Kenneth Andrade On Valuing Metals And Other Investment Themes

“You should expect corrections. They’re part of the cycle. [But] nothing to worry about since the market survived the gruesome slide in March last year,” said the founder and chief investment officer of Old Bridge Capital Management, a portfolio management services firm. “The year 2020 was nasty, but one must build portfolios irrespective of where the market cycle is.”

There are still opportunities and some industries have had “extremely robust” cash flows, Andrade told BloombergQuint’s Niraj Shah in an interview. “Purely on a price-to-earnings multiple basis, price-to-book ratio, or even on stock performance, you will still see pockets of value that are there. They are not as prominent as they were last year, but they’re still there.”

The current cycle is not like 2008 when everything got polarised around infrastructure, Andrade said. “We’ll have to pick and choose—companies or sectors. This time, it will be more company-driven, focusing more on the ancillaries around the company," he said. "It’ll be broad-based but not as much as it was in infrastructure and commodities in 2004-08.”

Sector Watch

Metals

Despite costlier commodities, Andrade suggested not to view metal stocks just from the perspective of prices.

“Even at current profitability levels, one good year of cash flow will completely change the balance sheets of these companies. India’s largest steel company could become debt-free with two years’ cash flow. I think we’re at that inflexion point where even if metal prices remain where they were in the last two quarters, a lot of companies in India will become debt-free with two years’ cash flow. Then how will you value them?” he said.

Manufacturing

Efficiency, Andrade said, is a key metric. The best way to play the manufacturing theme, according to him, is to go by a company’s energy consumption.

Chemicals

Andrade said the future of chemicals and research business is bright but investors should wait for consolidation. “Right now there’s a lot of hype. It was the same with real estate.” Also, growth that hasn’t actually taken place yet has already been priced in some of these stocks, making them pricey.

Information Technology

Technology, according to Andrade, is the right space but the valuation is still pricey.

Financial Services

With delinquencies building up, Andrade is cautious about the sector.

“Credit costs continue to remain elevated and retail franchises are getting fragmented quite a bit. There are a lot of fintech companies going after customers nowadays. Pricing of most of these businesses will come down. We’re not very aggressive on banks,” he said.

Real Estate

According to Andrade, there are a couple of factors that are working in the sector’s favour. “Inflation and interest rates. Housing loan rates are at rock bottom, and real estate stocks are nowhere near their highest or even their IPO prices. It’s also an industry that is fairly consolidated. There are no mom-&-pop builders left and lending is far more organised,” he said.

Future Approach

Andrade said he’s relatively “old school”.

“We started off with commodities, manufacturing, energy and that’s a nice place to be in. For those who like financial services, can invest in a corporate bank or two. Agricultural inputs, farm equipment companies are also trading with good valuations, but they could have near-term headwinds.”

A good way to end up with a healthy basket, according to him, is to follow companies that are putting up significant capital expenditure. “You’ll find a way out there.”

Watch the full interview here: