Enron-Style Fraud Creates an Opportunity

Thanks to an Enron-style fraud at Satyam Computers, stocks in India have never been as cheap as they are today.

The chairman of Satyam, a huge software company, gave himself up, saying he'd been "cooking the books" for years. He'd overstated profits and overstated the cash balance... at this point by billion of rupees.

When he gave himself up, shares of the company fell some 78% in a day. Other major Indian stocks fell by double-digit percentages. Investors are worried about which company is next.

Now, on a price-to-earnings basis, India is as cheap as it's ever been in the 20 years. It's trading at about nine times this year's earnings.

There could be more frauds. WorldCom followed Enron. But this is a heck of an opportunity... The last time Indian stocks were close to this cheap (mid-2003), they rose roughly 700% in US dollar terms until they peaked at the end of 2007.

Most investors are scared. The foreign investors who hadn't fled already have surely left by now. Hardly any major international brokerage firms have a "buy" recommendation on India. We see it as an opportunity – there's nobody left to sell.

India doesn't have a credit bubble, a real estate bubble, or a debt problem. And India has a domestic market, so it doesn't rely on exports nearly as much as China does.

At some point, the big brokerage firms will recommend India. Each recommendation will mean new buyers. Foreign investors will return.

We prefer to buy when everyone who wants to sell has sold. We prefer to buy when everyone is bearish. The biggest gains in investing come when things go from bad to less bad. And India is on the brink of that now.

What's the best way to play it? Use the scandal as a cheap entry point. There may be another one or two scandals... or not. But this is too cheap to pass up.

We think one can enter this trade without much downside risk.
Good investing,

Resdtech Team.