It’s celebration time on Dalal Street with the Sensex breaching the breathtaking 10,000 mark. At this juncture, do you feel tempted to corner a piece of the action by taking the plunge into equities?
If you do, here’s a word of caution: the stock market is overheated and valuations are overstretched. So, think twice. Your prime concern right now should be capital preservation and not returns.
THEREFORE… It is better to adopt a conservative strategy and invest in stocks that have a brimming cash kitty and strong future expected cash flows.
CASH-RICH COMPANIES – NEED OF THE DAY
The present bull-run, which started in 2003, is one of the longest in the history of the Indian capital markets. However, the current Sensex peak has warped the risk-return equation. Now, a lower return expectation is accompanied by higher risk. In such a scenario, it is safer to invest in cash-rich companies that represent real assets. What’s more, such companies are better placed to weather any future downtrend.
BENEFITS ALL AROUND
A robust economic growth and limited capital spend by India Inc., during the last 3 years, has resulted in huge liquid cash reserves with companies. Banking on their cash reserves, such companies can fund their expansion plans (organic or inorganic), with considerable ease even in a difficult business environment. Needless to say, such companies would rely less on borrowed funds and hence their interest outgo would also be moderate. Moreover, being cashrich, such companies can reward their shareholders in the form on special dividends.
