Summary: As infrastructure activities pick up in India and globally, metal stocks have become an attractive investment option. But, before investing in them, it’s essential to look at certain key parameters, including long-term returns, P/E ratio, and market capitalisation, among others.
After a muted 2022, metal stocks are back in the reckoning. The Nifty Metal index has emerged as the top sectoral index, with 14 of its 15 components witnessing a double-digit rise. Nine components– companies whose shares are a part of the index - have risen by more than 50% this year. This trend is not surprising, given that spending on infrastructure, in India and across the globe, is growing rapidly. Clearly, the time is ripe to invest in metal stocks. That said, how do you choose the best metal stocks to invest in? Let’s find out.
Essential parameters to look at while investing in metal stocks
Before making metal stocks a part of your portfolio, it’s essential to analyse some key parameters. These include:
-
long-term returns
Returns are the primary consideration for any investor. At the heart of every investment is the need to maximise returns and it’s prudent to go for stocks that promise high returns in the long term. Metal stocks are no different. The way to go about this is to analyse a stock’s returns over at least 5 years. This is because stocks can be volatile in the short term, and gauging a stock’s short-term return may not give you its complete picture. A stock that has performed well in the long-term is more likely to add value to your portfolio and help you grow your wealth. On the other hand, stocks that have fared poorly in the long run are less likely to give you the desired results.
Markets generally go through bullish and bearish phases, and analysing long-term returns can help you gauge a stock’s true potential to weather downturns and weed out laggards. The top five metal stocks that score big on this parameter are:
| Stock | 5-year Returns |
|---|---|
| APL Apollo Tubes Ltd | 59.36% |
| Jindal Steel & Power Ltd | 25.92% |
| JSW Steel Ltd | 16.80% |
| Tata Steel Ltd | 15.14% |
| Hindalco Industries Ltd | 14.15% |
Source: Value Research; as on 28th August 2023; Index: S&P BSE Metal Index
-
Price-to-earnings ratio
Price-to-earnings (P/E) ratio is another important parameter to analyse before picking up metal stocks for investments. It helps you compare a company’s stock price to the earnings it generates. This ratio tells you whether the price accurately reflects the company’s earning potential or not. A high P/E ratio indicates that the stock is expensive, and its price may fall in the future.
On the other hand, the lower the PE, the more attractive the investment potential. Generally, a PE ratio of 20 or less is considered good and may present an attractive opportunity. If you are looking forward to investing in metal stocks based on this parameter, the top five stocks could be:
| Stock | P/E Ratio |
|---|---|
| Coal India Ltd | 5.18% |
| NMDC Ltd | 6.18% |
| Vedanta Ltd | 10.07% |
| Hindalco Industries Ltd | 11.90% |
| National Aluminium Company Ltd | 13.75% |
Source: Value Research; as on 28th August 2023; Index: S&P BSE Metal Index
-
Market capitalisation
Market capitalization (or market cap) refers to the total value of a company’s stocks and is calculated by multiplying a company’s outstanding stocks with the price of one stock. You can also consider a metal company’s market cap before investing in its stock and opt for companies with a large market cap.
For example, if the total number of outstanding shares of a company is 10,000 and the price of the stock is INR 10, then its market capitalisation would be INR 1 lakh (10,000x10).
Companies with a large market capitalization are dominant players in their segment. They generally have strong balance sheets, robust management, and fundamentally sound stocks that can weather market downturns. Investing in them can help you make significant gains in the long run.
Also, companies with large market caps are better equipped to take advantage of any market opportunity arising due to changes in regulation or policies as they have the required resources and workforce.
If you select metal stocks of large-cap companies, these are your choices:
| Company | Market cap (in crores) |
|---|---|
| JSW Steel | 1,892,781 |
| Tata Steel | 1,436,633 |
| Coal India Ltd | 1,414,346 |
| Hindustan Zinc | 1,340,271 |
| Hindalco Industries Ltd | 1,003,045 |
Source: Equitymaster (As of 28th August 2023)
Summing it up
As evident, you can pick up metal stocks based on these crucial parameters. Note that no two investors are the same, and the preference can vary based on individual preferences. While some investors may opt for stocks based on market cap, others may prioritise reliable, long-term returns. That said, conducting due research and investing in alignment with your financial goals is paramount.
Also, keep invested for the long haul and don’t get unnerved by short-term market blips for the desired outcome.
Happy investing!
Disclaimer
The investment options and stocks mentioned here are not recommendations. Please go through your own due diligence and conduct thorough research before investing. Investment in the securities market is subject to market risks. Please read the Risk Disclosure documents carefully before investing. Past performance of instruments/securities does not indicate their future performance. Due to the price fluctuation risk and the market risk, there is no guarantee that your personal investment objectives will be achieved.