There are two kinds of stocks one must try to find and get in your portfolio. The first kind may be described as a 'multibagger' kind of stocks. Stocks which perform extremely well, maybe double or triple in a couple of years in normal conditions. These stocks also run the risk of heavily underperforming in difficult times like recession. The other kind of stocks is what i like to think of as 'safe stocks'. These stocks outperform the index even in case of slowdown.
Take for example Hindustan Unilever. It is currently a market leader in sector called as Fast Moving Consumer Goods or FMCG for short. It includes daily consumer goods like toothpastes, soaps, etc. The logic for this being a safe stock is very simple. Even if people feel the pinch of bad economy they wont stop using things like toothpastes and soaps, would they?
The point will perhaps be clearer if we compare its one year price movement chart with that of nifty.
Over the past one year, a clear downward trend in Nifty is visible in the image on the right. Nifty has lost around 50% of its value in the current economic slowdown.
Compare this with the price movement of Hindustan Unilever. There are some 'panic' downward movements but the overall trend for the past one year is clearly 'upwards;
This stock has in fact gained approximately 30% value in the past one year.
The current P/E ratio of Hindustan Unilever (NSE Code: HINDUNILVR) is around 35, which is slightly high for my comfort. I think entering this stock at a P/E of less than 30 - ideally in fact less than 25 - would make more sense. Other attractions include relatively debt free business model which generates a return on capital employed (ROCE) of over 100%!.
Hindustan Unilever posted a 2.5% drop in Net profit in the quarter that ended on Dec 31 2008. You might ask if this stock really deserves to be traded at such a high P/E given that it has shown no growth? However note that its sales have increased by 17% and the loss it made arise mainly due to write down of value of investments and loans to a subsidiary - source Bloomberg.