Friday, July 22, 2011

Expensive

Unless one is buying Quantum Stocks with several times (read 3 - 10 times) higher intrinsic worth which are unlikely to see much downside or value stocks (I know growth and 40 year forward survival expectation is part of value equation too). I would begin to dump or have already started selling all holdings with high-expectations for future because let me tell you with an example.

Example:

I agree that future prospects are bright for a company like Jubilant Foodworks growing at a nice clip. However, stock price is slave of earnings and we (or at least I do not feel the need due to abundance of alternatives, rather over abundance of stocks on BSE) need not pay premium just because an organisation is expected to grow @10-15% for next 30 years and a stock ranks as a single decision idea.

Why:

Because stock prices should be ultimately discounted value of their future cash flows, I feel certain stocks are over valued as they will *never* (say next 15 years) earn as much as other simple ideas. In reality the stock prices are discounted hopes of future mental expectations. I'll stick my neck out and and would try to make a prediction:

Jubilant Foodworks although not in comparable business as a Bank but this one at CMP 875 will not ever (say until 2025, trust me that is a very long time in Equity Markets) will not be able to match EPS of Jammu and Kashmir Bank until 2025 (CMP 860, Div Yield 3%). i.e by 2025 (too far a timezone, a lot of things can go wrong) I believe growth rate of J&K Bank would be as good or superior to Jubilant Foodworks and its EPS would be far higher, but market does not feel that way.

I heard a respected stock market investor Ramesh Damani speak about Dabur being fairly valued as part of his portfolio. Personally, God forbid, unless I am struck by blindness or paralysis and unable to pursue the search, why should I buy a 15-20% grower @ 40PE just because its expected to survive my grandchildren's generation. Too heavy a price to pay for higher certainty. With benefit of hindsight check the returns of Axis Bank vs HDFC Bank between 2000 and 2011.

A handpicked portfolio of choicest small caps should provide far superior returns as they have over past 100 years.

I am all for growth, greed and returns at a faster rate but refuse to ride the 40PE bandwagon.

An Idea

Market leading companies in brand new industries tend to do very well at least for few years or a decade. Stumbled upon GOGO/ Aircell, an innovative company leading a sector, experiencing exponential growth. Check it out www.aircell.com. Provides wifi, smartphones on Aircrafts.

Was granted exclusive air-to-ground broadband frequency license in  FCC auction in 2006. Buffett's Netjets is also one of their clients. Not listed on stock market. Hey, if you are a PE player you can always try.

Leave room for positive surprises !

Sunday, July 17, 2011

Matter of Choice ( Astral Poly Technik vs Technofab Engineering)

One is in a convenient position when a choice has to be made amongst two fine alternatives. I am in a similar bind between two such alternatives from infra space. Although in theory the companies are not comparable as one is into services and another into primarily manufacturing.

But they both carry an Infrastructure label, and I know that from experience that it is an area that will continue to be a painful for investors for coming decades simply due to the roller coaster nature of crowd psychology.

Astral Poly Technik vs Technofab Engineering.

Both are nice mid / small (depends on your context) cap companies. It becomes a matter of choice since I don't want to buy both of them. With that line of thought I would end up with 100 stocks.

Technofab Engineering has a relatively more polished workforce, it ranks way higher. However, in Indian context EPC companies are generally cash flow negative.

I'd liken Astral Poly  to a "value migration" leader in Indian context from metal pipes to CPVC and plastic pipes, remember cellphones in 2002 ?


One aspect that did put me off regarding Astral was Lubrizol tie up with Ajay Group (http://www.ajaycorp.com/cpvc-pipes.html) and Ashirwad Group (http://www.ashirvad.com). Vaguely recall having read Buffett talk about mountain of riches for a single company that controls a single pipeline in a state/region, antithetical view is misery for all companies if there are four overlapping pipelines in same region.

There are other companies too in CPVC overseas which are as strong and big as Lubrizol which have not yet entered India as yet in any major way except through distributorship. If the scale of opportunity was not that big (tens of thousands of crores) I would have dismissed Astral Poly right away. So a 40% grower at 5 PE or 12 PE ?

More thoughts...

The compound is hard to make, is the secret sauce and proprietary, therefore no other compounder is able to match the price point, as yet not even Reliance is thinking of it although they have other polymer businesses, therefore Chinese cannot be a threat.

In 10-20 Years we will see very little or no GI pipe, the sand is shifting

As per my research Lubrizol has 50%+ market share not just in India but globally in CPVC segment, Chinese imports do not match in price point as per management ( need to be checked  from market sources ). Astral is educating over 30,000 plumbers per year, its their mind they have to get into, not in minds of end users.

Saturday, July 9, 2011

Value Investing with the Masters - by Kirk Kazanjian & Interview with America's top Traders - by Jack D. Schwager

Value Investing with the Masters

Comprises twenty interviews with market beating fund managers. I found this book quite humdrum. A few underline worthy statements, though they come up in other books as well.

- 90% of gains in equities are made in 2% of the time duration, stay the course and keep plugging

- Stocks that fall down have to be rubber balls not eggs !

- Depreciation policy of British and Copenhagen airports writes them off at 100 vs 20 years, valuation measurement should vary, and airport after all is an airport !

- Stock picking is like farming, seeds (money) have to be sown, not all seeds grow, suitable climate (sentiments) matters, seasons change but not as regularly as in farming and can last years.

- Graham later in his interview with congress replied in response to valuation of company as, future earnings of the company and to an extent current assets. Fan boys who keep pressing for current assets metric miss out on opportunities. Same way Buffett aficionados presume its sinful to invest in technology, just because technology is not in Buffett's circle of competence.

Market Wizards


Read a couple of chapters, excellent insights into minds of successful traders. Found this way more impressive. Some juice from the ripened fruit:

- With all due respect to Buffett's statement, trading / investing is not about investing in great companies with durable moats but about profiting from inefficiently priced stocks. One could invest in great business yet make ordinary returns.

- From a psychiatrist who helped suicidal patients and later athletes and fund managers - it is very difficult to win an Olympic Gold medal or be the best fund manager, the distinctive trait of winner is that they decide and take a resolve that they would win
 
- Don't think of making money, first worry about not losing money

- Any investment approach that is heavily reliant on accurate forecasting for several years ahead or involves the purchase of high-expectation stocks is inherently risky.

- more to read..