This makes it difficult for you to have a counter party ready to trade at a fair price.
Not only does this make the stock more volatile, but it also prevents you from buying or selling the stock at your desired price.
In addition, trading in illiquid shares can increase transaction costs, as such investments usually have high fixed costs.
However, despite their uncertain nature, illiquid stocks have gained popularity.
From large pension funds to individual retail investors, people are becoming more accepting of illiquid stocks.
There are many reasons for this, with high returns topping the list. The belief that the returns are high and that you can benefit from potential diversification, makes them an attractive investment opportunity. So with that in mind, we look at some fundamentally strong illiquid non-debt stock This can be a good investment.
1. 3M India
3M Company, USA, a direct subsidiary of 3M India is a techno-sciences company catering to various sectors such as healthcare, consumer, transportation, security and electronics and energy.
The company’s profits have grown astronomically. Barring that outright pandemic impact, when the company’s profits declined marginally, they have grown at a CAGR of 28% over the past seven years.
The stock has created a huge amount of wealth for its investors. It has increased five times in the last seven years.
Operating in the industrial segment, the company lacks bargaining power which results in low margins. However, building a strong and trusted brand name has helped it gain traction in the Indian market.
With no debt on the books, the company has earned substantial returns for its shareholders. But despite strong profits and returns, the company never paid dividends.
What the company is not paying to its shareholders is getting accumulated on its balance sheet. Currently, 3M’s cash reserves account for 32% of its total assets. In addition, the company’s net working capital is positive, indicating its ability to invest and grow.
But despite its stellar performance, 3M is still a liquid stock in the market.
Held by market maven, Radhakishan Damani, the stock is currently enjoying a high (price-to-earnings) PE valuation of 92 times, much higher than its 10-year average of 78.4 times.
2. Kirloskar Pneumatic Company
A part of the Kirloskar Group, Kirloskar Pneumatics deals in an extensive list of products.
Their product catalog includes air compressors, air conditioning and refrigeration systems, process gas systems, vapor absorption systems and industrial gear boxes.
Kirloskar Pneumatics is in business for more than six decades. The company’s oil, gas, steel, cement, food and beverage, railways, Defense and marine.
Considering the negligible debt on its books, the company has rewarded its shareholders handsomely. Not only has the stock grown four-fold over the past ten years, but so has the company’s generous dividend policy.
It has reported an average dividend yield of around 0.9% over the past 5 years.
Even after paying high dividends, the company has a strong cash balance, which accounts for 25% of total assets. With positive net working capital, the company is poised to grow at a fast pace.
But none of this changes the fact that Kirloskar’s growth profile has been shaky. While the revenue CAGR has been 7%, profits have grown at a mere 2% CAGR in the last ten years.
Due to its modest performance, the stock trades at a PE of 31, which is a deep discount of 67 times the industry PE. However, it is trading at a premium of 19 times its long term median PE.
3. Swaraj Engine
Swaraj Engines, a captive unit of Mahindra & Mahindra, which holds a 34% stake in the company, manufactures diesel engines for Mahindra & Mahindra tractors.
Despite the high level of customer concentration, the company’s revenues have grown at 9% CAGR and profits by 8% CAGR over the past ten years. But this modest growth in topline and bottomline hasn’t affected the company’s value in the long term.
Swaraj Engine has given excellent return on equity averaging around 32% over the last ten years. In addition, the company has phenomenal dividend yield (average of 3.6% over the last 5 years). This coupled with an impeccable balance sheet makes it an attractive investment.
The company is trading at a PE of 15.8 times, which is at a discount to its 10-year average PE of 20.3 times and industry PE of 44 times.
in conclusion
liquid stock with strong infrastructure Can be a good investment. But it is important to understand the kind of risk they add to your entire portfolio.
The liquidity of the portfolio is an important principle of investing. The ability to easily convert your shares into cash should never be overlooked on the pretext of higher returns.
You never know when you might need money.
Happy investment!
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com