Future of the Stock

A Value Stock is the one which trades at a discount to its intrinsic value. The intrinsic value can be found out through future cashflows or dividends or by using a discounted cash flow analysis. such stocks exhibits high dividend yields and lower price to earnings ratio. The intrinsic value of a stock is based on the future prospects and predictability of earnings. Many of us look at the past earning and history of performance but this in my opinion can lead to a trap. Business landscape today is changing so radically, the past formula of success is being re-written. Technology, changing demographics play a crucial role is such unprecedented change. So the value of the company is based on the future earnings and performance which should be the new reference. Recently we sold most of our holdings in a FMCG company that we held for almost 4 years. The earnings had not only deteriorated in the past few quarters but we see a huge dilution of demand. This company had grown at rapid pace for the past several years and likely to see slackened future earnings prospect, a good enough reason to sell the stock. In the portfolio, we have replaced with a Finance company that we believe should offer future prospects.

How does one predict the future? Some businesses especially technology firms believe you create a future by disrupting the present. Visionary business leaders have the magic eye to see what is changing and adapting their business models to take advantage of such changes. With such changes we will see value migration that will result in huge uptake of demand. A well known example is the how the nuclear family lifestyles has created demand for cookers. More nuclear families meant more cookers. TTK Prestige was able to take advantage of this change is lifestyle by launching products that looked and felt better. But companies like Hawkins failed to take full advantage of such changes.

The opportunity is the same for the market, but the management that has an eye for how the markets will change are the ones that will succeed.

In the Banking industry HDFC bank has proven how they could anticipate and manage change better than others. But Change is constant and so will have to be the management to keep ahead of change.

On a side note, Lupin drew some negative attention correcting by a whopping 40% in 6 months. Do we see value in it at 1300? 

Check this Video to see how they are managing the change 

Make the most of it !

The best investments are done during times of uncertainty and tough conditions. Market overreacts to good news and bad news. They respond more strongly than what is appropriate. That's why when Modi took over almost 20 months ago, it touched an all time high with out any change in business fundamentals. Today it is overreacting to many negative cues on global as well as domestic fronts. These are cycles and while we can't predict accurately when the direction will change, one thing is sure. In the long run, markets will behave rationally. The broader markets have come down by about 20% from its peak without considering long-term market prospects.

Some of our best companies whose stocks we hold, have also corrected significantly making them juicer. It requires a clear mind void of confusion and one that appreciates 'business like investing' to identify the opportunity. The same market that behaves in an irrational manner will be rationale in the long run, the ones who understand this will profit immensely. Again this cant be borrowed belief, it has come from ones own experiences and analysis. 

We have seen world-wars, Lehman crisis, terrorist attacks, but we are doing well. That's the nature of the world and business. As the RBI governor rightly summed it up, The Stock Plunge is a market problem, Not Economy's. We must differentiate between market sentiments and business fundamentals.

Invest when times are tough and there is no better time than today. We need to be mentally prepared to do this as we normally get swept in the emotional turbulence. You can start by looking at recent looser, stocks that have been battered between 20% to 50%. Make a list of stocks that you wanted to own but found them expensive in the past, they might have become reasonably cheap. Make the exercise objective and attach no emotion to this. The Sale is on

For help and a list of stocks that we wanted to own and are on sale please email research@learninvest.in

Trends and Off Trends

Microfinance, Real-estate, Hospitality and Publishing are now not really in the trend. But these provide reasonable margin of safety on stocks of some good companies. A microfinance glut and government apathy turned this into a spoilt broth, but there are opportunities lurking here with companies that have grown at 60% CAGR and long lived for 25 years with legacy. The sectors such as real-estate too have some good beginners with ethical practices that can grow very big in the coming years. This is time when we can invest in these companies as the sectors are out of fashion and hence beaten down stocks provide a good degree of margin with limited downsides. These stocks are quoting at reasonable valuations at current prices of of  360 and 1300 respectively. They are likely to grow and create wealth for the contra-investors.

Same with new trends that will become main stay. When Infosys leveraged on the trend of services outsourcing, it was a new trend that made wealth. Today the world of  Big Data and cloud will turn to become mainstay in the years to come as many enterprises adopt them for their business. There are 2 companies that have very unique positioning in the market today and will likely get bought out or grow organically. We look at the size of the opportunity here, how big is this adoption going to change the quantum of revenue and earnings. Mere growth is not sufficient, this growth should bring more economic value to the investor. Economic value is created when the return on capital is more than the cost of the capital, while the company continues to grow. So we need growth with economic value being added.

As a long term patient investor, you need to continuously water plants while cutting of the weeds.Our economy is on the upswing if you ignore the immediate issues at hand. Our duty as investor is to look for great businesses run by capable management of integrity and with execution skills that result in consistent and profitable growth. The business that have longevity, predictable performance, large opportunity size.

To know of the stocks discussed, please mail us at research@learninvest.in

Check blog The Money Making Machine

The Magic Formula

Greenblatt presents a “Magic Formula” for buying good companies at good prices. A good company and good price is identified based on two financial ratios.

 (ROIC)  Return on Invested Capital represents “good company” while Earnings Yield represents “good price" 

ROIC tells us how much cash a business is able to generate in relation to the capital invested in them. As an investor, it means how much money you are able to take away from the business in relation to what you have invested.

 Earnings Yield tells us an an investor how expensive the company with respect to the earnings it generates.  Is a rupee worth more than or lesser than itself at the given instance. This is a key ratio to determine an investment.

The Magic Formula considers these ratios in equal weight and ranks all companies as Good Company (ROIC) and Good Price (Earnings Yield).  Their ratings on both counts are added together.  As per the formula, the investor buys and holds the companies with the best combined rankings for a period of only one year. He then sells them and does the same allover again. This method is clean and simple, yet effective for someone who wants wants to learn about investing. You can start by reading the little book on investing.  

In India, we need to consider an important parameter, which is quality of the management. We have to consider management that are highly focused and believes in allocation of capital. Companies that dilute equity very often will not reward investors.  As a noted investor quoted about JSPL, a company operating in a sector where there external problems. the company although is in the commodities (steel & power) had returned a CAGR of 37% over the last 15 years (share price from Rs 1 (2001) to Rs 156 (2014). It goes to prove that if the management is good, it can grow and survive in any market.

A Money Making machine from 2011

A friend recently narrated how a huge investment he recently made has turned very negative. He was surprised that the stocks had made money for many others but failed to help him. I had a realization of sorts after this discussion. It’s the attitude of investing small amounts over a long period of time versus that of investing large amounts over short period of time that makes the results different. People who follow the latter are wrongly hoping that they will get lucky in the ‘get rich quick’ schemes in stock market. This never happens, invariably after you invest the stock typically goes down as our investments are timed in such ways. We invest when we hear a friend  bragging how he made quick money and very often such prices will reverse to the mean causing losses to ourselves.

If you are sure about the fundamentals of the company and its growth prospects, don’t sell the stock only because there is no movement in the price. The stock price will move up sooner or later and when it does, it would make up for the lost time.

My own experience teaches the same.

On 25^th May 2011, 4 years ago I had blogged about this stock when it was quoting for Rs 3,925. On 27^th May 2014, it was quoting the same price Rs 3,928. Anybody who had invested would have been frustrated except if he is an owner of the stock of the business. He continues to stay invested because he is a part owner and he is interested if the company is growing its earnings and revenues, keeping debt in control. Now like magic, the market works wonders. From June 2014, the stock price of this scrip kept moving north nonstop and now quotes at Rs Rs 8,200.

The way to look at this is that the stock price went up from Rs 3,900 to Rs 8,200 in 4 years accumulating an approximate 18% CAGR (per year return). What decisions went into investing, and what decisions made you to hold it for 4 years? Read Here

Lessons.  

Remain “extremely passive” with your investments;

buy quality stocks; companies that have great competitive advantage

and companies with honest management.

One should never hesitate to pay for quality and then remain passive.

There are investment options always in the market, one has to develop the right attitude to win the Stock Markets. It starts by being business literate.