Comfortable with recent trading successes, I find myself marveling at the current lofty valuations of TCS, Wipro, Infosys, HCLs. They are well-run, professional companies, cash-rich, but earnings for this sector peaked years ago, their growth rates are in the low single digits, some flat in constant currency. While in the US, many of my trader friends regularly shorted Infosys into earnings. (Infy along with the others, trades as an ADR in the West, one of the reasons why the financials of these companies are squeaky clean).
Meanwhile, I am a frequent speaker now at the quarterly business leader’s forum at one of these IT firms in Bangalore. My charge is to talk about the global economic climate, but the participants are eager for my take on the future of their sector. I don’t hold back, tell them what I just wrote above. Where is your growth? What are you doing with IoT, machine learning, blockchain, I ask. They have lots of plans but no grand strategy, perhaps they don’t want to reveal it to me. “But we have lots of cash Sir” the participants say, to which I retort, “Is it your money or the shareholders? If you don’t know what to do with it, shouldn’t you be giving it back?” For my frankness, I am gently told later by my hosts that I should just stick to my script and not bad-mouth the sector! And, in fairness, their boards do approve gargantuan buybacks on a fairly regular basis.
But I want to short them! A voice in my head says,”you don’t short stuff at the highs Badri.” A slim little book called “How to short stocks” used to be on my shelf in my US office, full of stories, charts, graphs of how the best shorts were those that were already down. Another voice, says this is India, maybe those rules don’t apply. So I wait. Infosys reports earnings, and promptly tanks. Should have done it, I tell myself and go after Wipro with puts. Earnings come in, they are flat to 1%. The stock of course goes up because they announce another buyback to cushion those mediocre earnings. Beginner’s luck seems to be over for now, the shorting rules apply globally. Down 50% on the puts, they expire at the end of May, exit during possible election I tell myself. Yet again, a a trade has become an investment. Lessons learnt, forgotten, have to be relearnt again. Such is the way of markets.