India: bold investment or reckless gamble?

Thanks to an Enron-style fraud at one Indian company, stocks in India have never been as cheap as they are today.

The chairman of Satyam, a huge software company, gave himself up this week, saying he’d been “cooking the books” for years. He’d overstated profits and overstated the cash balance… at this point by a billion dollars.

When he gave himself up, shares of his own company fell some 78% in a day. Other major Indian stocks fell by double-digit percentages. Investors are worried about which company is next.

Now, on a price-to-earnings basis, India is as cheap as it’s ever been in the 20 years of data I have. It’s trading at about nine times this year’s earnings.

Yes, I’m aware there could be more frauds. WorldCom followed Enron. But this is a heck of an opportunity… The last time Indian stocks were close to this cheap (mid-2003), they rose roughly 750% in U.S. dollar terms until they peaked at the end of 2007.

Most investors are scared. The foreign investors who hadn’t fled already have surely left by now. Hardly any major international brokerage firms have a “buy” recommendation on India. Call me crazy, but that’s something I LIKE to see.

I see it as an opportunity – there’s nobody left to sell.

Everyone points out the warts on India these days. But nobody points to the beauty, from an investor’s perspective… India doesn’t have a credit bubble, a real estate bubble, or a debt problem. And India has a domestic market, so it doesn’t rely on exports nearly as much as China does.

As my friend and Indian hedge-fund manager Rahul Saraogi says, “We have crisis prices here with no crisis.”

At some point, one by one, the big brokerage firms will recommend India again. Each recommendation will mean new buyers. Foreign investors will return.

I prefer to buy when everyone who wants to sell has sold. I prefer to buy when everyone is bearish. The biggest gains in investing come when things go from bad to less bad. I think India is on the brink of that now.

What’s the best way to play it? I like the PowerShares India Portfolio (PIN). It’s widely diversified across 50 Indian stocks. It did hold Satyam, but now Satyam makes up only 0.03% of the portfolio (essentially nothing). The rest of the companies in this portfolio are making serious money – with an average return on equity of 28.5%.

PIN holds the major companies of India… and those were hit hard when the accounting scandal was announced – some fell by double-digit percentages.

I suggest using the scandal as a cheap entry point. There may be another one or two scandals… or not. But this is too cheap to pass up.

I think you can enter this trade without much downside risk. The low for shares of PIN was $9.58, about $2 below where it’s trading now. If it falls below that recent low, I’ll consider myself wrong.

So you have about $2 of downside risk – for the potential of triple-digit returns in as soon as a year. If 2003 repeats, you’ll see 750% in less than five years… or better.

A few months ago, I traveled to India with fellow DailyWealth editor Tom Dyson. I urge you to go back and read what we wrote about our trip in DailyWealth. If you’re a subscriber, you can read my True Wealth issues. And if you’re a lifetime member, take a look at my last Partners Letter, which featured a guest essay by Rahul.

Downside of $2, upside of potentially hundreds of percent, in an investment where there’s nobody left to sell. I like those odds… Buy India!

This article was written by Dr. Steve Sjuggerud for the free daily investment newsletter DailyWealth.


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