How to select Monopoly Stocks to invest | Delivery Trading Strategy
A monopoly market is a form of market where the whole supply of a product or services is controlled by a single seller. As a result, monopolies are characterized by a lack of competition within the market producing a good or service. Hence for an investor, a monopoly or big Moat stock is similar to a gold mine. This is because if one can find a suitable Moat stock to invest in they provide significant returns in the long turn. Read this article delight if you want to know How to select Monopoly Stocks to invest .
How to select Monopoly Stocks to invest
Which Monopoly Stocks to Avoid !
There are a lot of parameters which should be kept in mind before investing in monopoly stocks. For a good delivery trading strategy , it is mandatory to know what type of monopoly stocks one should be buying and what type of monopoly stocks one should be avoiding. So some key points relating to this are discussed here :
Avoid PSU trading at its higher or average price
If it’s a PSU company and if it is trading at a slightly higher price or even at an average price, you should avoid buying it. A classic case in point is the IRCTC case study. Almost all the retail investors think that IRCTC Is a great stock as it’s a monopoly stock and it has given so much run up. But if you see the investor holding in IRCTC here https://trendlyne.com/equity/share-holding/167028/IRCTC , you will clearly see that Mutual Funds have decreased their holdings in IRCTC along with number of mutual fund schemes going down. Also, the Institutional Investors have decreased holdings from 16.29% to 11.75%Â along with the investor holding of FIIs coming down. Only public’s investing is going up. Why? Because we are so attached to Railways and we see it as a monopoly stock.
First and foremost the PSU companies are run with the intent of serving the nation or serving the politicians. That is the first key reason they are not even trying to make sustained profit. This is the same problem that Coal India and even PSU banks also have. Despite having massive competitive advantage, their focus is not profit making. We can understand more of this by taking a banking example. The objective of PSU bank is network extension. So they go all across the nation and build more branches. Even if that branch is running unprofitably, PSU banks will continue to run these simply because they want to give accessibility. Now from a pure investment perspective, investing in such monopolies stock is probably not a good move.
Also with one move of government, the entire company’s market cap can dramatically change. So it’s always risky to invest in such PSUs.
Avoid company with limited growth
If the company has limited growth potential or limited growth prospects, please avoid . A classic case in this regard is the BHEL stock. Just google and take a look at the list of monopolies in India. BHEL features into it nearly all major sites. Now, BHEL is a flagship engineering and manufacturing company, owned and controlled by the government of India that manufactures and erect integrated power plant equipment , but if you take a look at the profit and loss statement, you will see that the sales have hardly grown. In 2010, sales were 33.5k. Now it’s standing at 20k and it has barely moved above 33k, maybe two, three years. Actually, there is no incentive to grow this revenue and also there is very limited scope of cutting cost. Get better understanding of this by taking one more example. Let’s say tomorrow RPA technology or robotic process automation technology comes into the picture. Now as Indian Railways employs a big workforce and there are obvious cost saving opportunities, by rationalizing the workforce, do you think that Indian Railways can take that step of firing people? They can’t do it because there will be people sitting on Dharna and bunch of other different things. So again from that particular investment perspective, whenever you find monopolies that has limited growth prospects, can’t increase their business, don’t have a lot of avenues in terms of cutting costs , please avoid it.
Avoid company with unclear growth prospects.
Depending on the type of an investor you are, you could consider avoiding companies where the growth prospects are not clear. Now, there is a difference between point 2 and point 3. Point 2 is that the company does not have many avenues to grow in terms of increasing its revenues or bringing down the cost. Point 3 is that there is no clarity on growth. A classic case in this regard is the ITC story. If you take a look at the ITC business, you will see that the sales of ITC has been consistently growing. It’s not as if there was any kind of sales problem or profit related problem. But why is it that the ITC stock does not move? The reason there is fairly simple, that clarity on the most profitable part of ITC’s business is not there. ITC sells a lot of cigarettes and every time the budget is announced, people start fretting. People start believing that ITC stock is going to go down because the government is going to impose more syntax. Then it becomes a problem for a company like ITC. Despite generating good results, despite having good management, despite performing well in the market, their stock prices do not go up. And one of the prime reasons is that business clarity is limited. The moment the narrative for a company like ITC changes , such as from a cigarette manufacturing business, they are pivoting to FMCG and hotel business which is bringing a lot of revenues to them ,ITC stock will become a rocket.
Avoid company that is cyclic
If the nature of the business is cyclical, that some years it goes up, some years it goes down, avoid it. A classic example is the Coal India. Coal India is mainly engaged in mining & production of coal and also operates coal washers. So basically, whenever the mining of the coal in India goes up, coal India stock will go up. Whenever the mining of the coal in India goes down, Coal India stock will go down. Now, do you know how much the Indian government is going to import coal next year? The answer is no, you don’t know and neither can we predict. And therefore there is no point in getting into these cyclical businesses They will just move sideways and becomes a headache for you despite owning a monopoly stock.
Avoid company with high government intervention
Be on the lookout for sectors where the government intervention is going to be high. Back in 2009, government made an announcement that if you run a private school unaided, which does not even get help from the government, you will have to reserve 25% of the seats for weaker economic sections of the society. Great move from a social perspective, but if they have to go and reserve 25% of the seats on which they are not making much money, they had to close it down. Now, of course, we can all present our own stories here, but the point to drive home here is fairly simple, that government intervenes quite excessively in a bunch of different businesses. So please try to avoid those businesses because with one stroke of a pen,25% profitability of any business can go down. Great news. If you invest in tech companies, then this type of situation is very difficult to play out. Why? Because technology
companies have grown really fast and by the time government understands anything, technology companies move on to the next level.
How to select Monopoly Stocks to invest in India !
So there are three specific criteria’s that you should keep in mind.
Number one, the firm should look to make profits. For example, Nestle. Do you see how many different types of Maggie are there? Now, Nestle is a market leader in the Maggie market and it keeps on launching new brands after brands. The bottom line is that Nestle is a company that is actually interested in making profit
Number two, the company should have specific MOAT.A classic case in this point is Pidilite. Pidilite has a product called as Fevicol. Now, do you remember the tagline of Fevicol?So that tagline in itself is recalled and remembered by crore and crores of people.Every time they go on a shop to buy any kind of adhesive, their preference would be to buy Fevicol. Now, commanding that particular brand value is a massive moat or a competitive advantage for a monopoly that is not going to go away, at least for the next ten years. So it becomes an investable company.
Third, and finally, a monopoly also needs to have a very clear growth path. You’ll see, Nestle India launches Maggie, basically a dominant so this is a brand campaign that they have launched. They have launched Fight Against COVID. They have launched Cola, Mint, beverage, Milo, Maggie Fusion noodles. If you go through the entire list, you will quickly see that they are just exploring new paths to profitability. So they are on that product launch roadmap. Whenever the economy improves, they will continue to exhibit similar behavior.
Final Takeaway : How to select Monopoly Stocks to invest
Monopoly business doesn’t guarantee of wealth creation. You can invest in monopoly business by properly evaluating the business model of the company and its profitability. Also, there should be good ROCE if the company is operating in MONOPOLY business. Being monopoly has business advantages but other considerations are also important. With this article delight, now you have fresh investing perspective that helps you pick up a framework of analyzing all monopoly companies. You have all specific criteria’s now on How to select Monopoly Stocks to invest.
Happy Investing 🙂
Read also : All about Contrarian Investing ! ( https://thebrightdelights.com/all-about-contrarian-investing/ )