Betting on Bullish India

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

It was relatively quiet for stock markets last week, with the Dow Jones up 0.12%, and the S&P 500 rising 0.50%. The MCSI Emerging Markets Index rose 0.38%.The biggest gainer in your Bull Market Alert portfolio was 3D-printing sensation Stratasys (SSYS), which you sold last Wednesday for a 25.19% gain in the stock, and a 170.37% gain in the options.

Other big gainers in your portfolio included Bank of Ireland (IRE), which rose 12.29% on the strengthening Irish recovery, and moved back to a BUY. Michael Kors Holdings Ltd. (KORS) rose 3.26% and last week’s pick, Apple Inc. (AAPL), added 2.41% for its first week in your portfolio.

Consistent with my commitment to helping you identify bull markets wherever they may be, this week’s Bull Market Alert takes you to one of this year’s top-performing stock markets in the world, India. And it does so through Mumbai-based HDFC Bank Ltd.(HDB), one of India’s largest and most successful banks.

Here’s why I think HDB should do particularly well during the next six to eight weeks as we head into 2013.

First, as you know, emerging markets go in and out of fashion. And it looks like after a period of being in the doghouse, India is back “in.” Last week, investment bank Goldman Sachs upgraded its outlook for Indian stocks, forecasting 7.2% economic growth during the next year in fiscal 2014, up from an expected 5.4% pace in the current fiscal year that ends in March. The upgrade comes after news that, after a period of backtracking, India has loosened restrictions on foreign investment in sectors such as finance, retail and aviation. That situation means India could once again become one of the more exciting destinations for investors in emerging markets over the next few years.

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Second, HDB is the single-best way to profit from this turnaround in investor sentiment toward India. With its earnings growth averaging just 20% over the past three quarters, HDB’s fundamentals are strong. The company’s fiscal second quarter earnings per share of INR6.50 (36 cents per ADR) topped the year-ago earnings by 27.5%. HDB also has a trailing 12-month return on equity (ROE) of 17.4%, compared with the peer group average of 11.4%, confirming that it reinvests its earnings more efficiently than its banking peers. And with a long-term growth projection of 30.0% per year, its current price/earnings to growth (PEG) ratio comes in at 0.82 — an 18.0% discount to the benchmark of 1 for a fairly priced stock.

Finally, December and January tend to be the strongest time of the year for emerging markets stocks. This, combined with Goldman Sachs’ recent “blessing” of India, means that a lot more institutional money will be flowing into India as part of a year-end portfolio re-balancing.

So buy HDFC Bank Ltd. (HDB) at market today, and place your stop at $35.90. If you want to play the options, buy the April $45 calls (HDB130420C00045000).

Portfolio Update

Bank of Ireland (IRE) jumped 12.29% last week. The European central bank recently highlighted the important steps Ireland had taken in restoring its economy. In addition, the Irish government has successfully sold a large portion of its long-term debt recently — enough to allow the country access to important credit markets before bailout loans expire in 2013. Rising above the 50-day moving average, IRE is now a BUY.

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National Bank of Greece SA (NBG) gave back 22.71% over the past five trading days. This follows your 16% gain in this option-like position two weeks ago. A wave of both positive and negative news buffeted NBG last week as authorities volleyed over the details of the next aid package. NBG is a HOLD.

Michael Kors Holdings Ltd. (KORS) rose 3.26%. KORS stopped just short of its 50-day moving average last week as it continued to recover from a recent dip. Nearly every analyst covering KORS rates it a “Buy,” and earnings estimates for its next quarter look quite rosy. KORS is a HOLD for the moment.

United States Natural Gas Fund LP (UNG) took a hit last week, giving back 11.31%. The energy sector dipped across the board last week as oil hit $88 per barrel. Natural gas inventories also were reported higher than expected last Thursday, further pressuring UNG and driving it below its 50-day moving average. UNG is now a HOLD.

PowerShares Listed Private Equity (PSP) gained 1.35% over the past five trading days. PSP added to its previous week’s gains and even managed to break solidly above its 50-day moving average. PSP now has its 52-week high of $9.93 firmly in its sights as investors have finally seemed to shake off their private equity election-day woes. PSP is a BUY.

Discover Financial Services (DFS) rose slightly. Although posting only a 0.36% gain last week, DFS managed to hit a new 52-week high. Discover Financial Services and the Six Flags Entertainment Corp. extended their multi-year corporate sponsorship deal last week, offering Discover cardholders several perks when they attend Six Flags locations in 11 U.S. markets. DFS is scheduled to report earnings on Dec. 13. DFS is a BUY.

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HollyFrontier Corp. (HFC) took a breather last week to close the week flat. This mid-cap oil refiner more than doubled in value over the past year and is quickly on its way to becoming a large-cap corporation. HFC pays a $0.20 dividend per share this Thursday. HFC is a BUY.

Apple Inc. (AAPL) added 2.41% for its first week in your portfolio. Although still only a rumor, many Apple watchers believe AAPL may pay out a substantial “special dividend” before the end of 2012 in an effort to beat tax increases due to the looming U.S. “fiscal cliff.” Any announcement of this type would certainly be bullish as investors pile back into this stock in hopes of getting a bigger slice of Apple pie (pun intended). AAPL is a BUY.

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