BULL in BEAR Market

Investment Learning
21

Thank You very much for sharing your experience. It is a privilege to learn from other’s experiences.

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Your post gives great hope in this bear market - I think it will be atleast the other end of elections before we see a return of bull markets. On stock selection, I would probably change the selection criteria slightly

Instead of looking at what dividends companies pay, I would look at their return on capital employed and their current profit

Lets say company x is trading at a market cap of 1000 crore and makes a profit of 100 crore. And consistently it has grown 10-20pc over previous years

The principle of value stocks is that you buy a part of the company only if you were willing to buy the whole company if you had so much money

So you are getting to buy this company that is trading at 1000 crore and makes 100 crore. If you owned the whole company you can take 100 crore per year in dividends so your earnings is 10% compared to putting it into bonds where you would make 7-8%

However this company is also growing. If you were the sole owner you would delay the dividend and let it grow at 10-20%. So next year if it grows at 10% you are making 11pc on your investment

You want your management to not pay dividend if they cant employ capital that generates 10% return and can reemploy dividends at 5-10-20pc growth

Something like this has potential to become a huge multibagger with margin of safety that comes from knowing that its making more than what bonds would make

Look at vinati for instance that has most of this characteristics

Ofcourse you would sell at some point - the right time is when the profit/market cap ratio is so out of sync like 1pc without a good growth prospect on the horizon

Most cases I’d want the company to retain and reinvest the dividends if they can invest in growth like Dmart is doing. For tax purposes its great instead of taxing dividends in 2 hands, mine and company’s.

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Value investing has different meaning for industries that are growing , maturing and declining … In each type of industries you need to use relevant metrics to gain maximum

  1. In Growing industries what you mentioned - ROIC and growth rate are very critical - You might let company also have some debt and also not pay dividends …

  2. Mature Industries - ROIC , PE , PSR , P/B , Dividend yield is critical . Even though some company many find new growth drivers but the probabilities are low .

  3. Declining Industries - Needs to traded like options with maturity period . Often you get big bonanza in these industries - Like what has happened in graphite electrodes in last one year …

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Graphite electrodes is a commodity business
The one who produces cheapest usually sells most unless there is a supply crunch
The present rally is because Chinese produced these very cheaply making most European and Indian companies uncompetitive
These uncompetitive industries closed operations or factories and now the Chinese closed factories but before closed Chinese factories, they obliterated the other producers

Value investors usually won’t touch that kind of industry. Traders will

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Pure Value Investors have just one principle -

BUY undervalued and SELL overvalued … They are sector , firm agnostic .

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Yes true but how does Graphite companies come under that criteria typically when Chinese stop producing. For a value investor they would have to be sold off and have a margin of safety. Even after a huge run due to supply constraints over a period of 10 years Oriental carbon still beats any graphite electrodes company purely based on consistency
My post said buy a company that is consistent and sold off with a history of consistent growth. If you buy these kind of stocks when they are sold there is massive upside compared to looking at percentage of dividend paid

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I don’t track oriental carbon and have no views on the same

I entered graphite India @ 77 price purely on basis on value . Chinese electrodes don’t directly compete with GI . The competition was with American , Japanese and European companies . So shut down on graphite electrodes should not have impacted GI primary market . The issue is sudden steel growth in developed market which was supposed to be declining and caught many graphite producers offguard. They had mothballed their capacities which is now being restarted … But this is where I would prefer the discussion to end on Graphite electrodes … as I too feel sad that I sold early at avg price of Rs 350 …

But What I mentioned Graphite electrode is as example of declining industry . Even in such industry you have opportunity to earn profits …

On consistent growth and high ROIC these are critical when you are buying a stock as part of core portfolio. But for opportunistic part of portfolio you need to ruthless on value vs price equation

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From what I understand, basically steel can be made with heat from coal or heat from electricity and electrodes. The chinese closed the former factories that made steel with fuel from coal hence the shortage of steel and electrodes as most countries prefer electrodes, it being less pollution free although from what I know they are just shifting pollution from one country into another and electricity as well just needs loads of coal to produce

What is your excel spreadsheet formula for sale - if you have prematurely exited too many companies don’t you need to review the formula. Or just one was a wrong sale. Anyway would like to know your views and formula to better understand how we can all benefit

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Things have started taking interesting turns …

Financials that were driving NIFTY have started correcting . I have very little exposure to financials except for 2% tracking position @ sector level mainly in HDFC , ICICI Bank & Corp Bank … as I never understood the sector but the FALL is TEMPTING me –

I started revisiting the sector to see if I can be BULL in this sector …

Some important characteristics of financial sector

  1. The financial sector especially lenders & banks are valued by price to book … But unlike a manufacturing or capex intensive company this book value is highly subjective …

Classic case is how book value of PSU banks started evaporating when NPA started climbing up . Valuation is subjective exercise but the if base nos itself changes YOY it becomes even more difficult .

SO IT MEANS SEARCH FOR COMPANY WHOSE BOOK VALUE MIGHT NOT SHIFT DRAMATICALLY - CONSERVATIVE LENDER – LOW LEVERAGE

  1. In Finance company Profits are front loaded and losses appear in future - unlike Pharma and FMCG were expenses are front loaded and profits come in future …

GE capital is classic case when the insurance underwritten in past has hit the overall GE now … ITC classic ( NBFC ) nearly pulled down ITC ( a great moat FMCG ) to near bankruptcy in 1990s . Both GE and ITC had great Finance minds / resources . ITC for example recruits best CAs in the country to run its finance function - Integrity of people in both organisation is of high standard and typically boards are very conservative . Yet these losses crippled the entire organisation … Amercian express finance function mistakes in 1970s enabled Warren buffett to buy the company at bargain prices .

**So one thing is clear for being BULL in Financial sector BEAR market SEARCH for a great company like ITC , American express whose financial arm is pulling down its overall valuation - It is that Warren Buffett kind of Move – MULTI MULTI BAGGER MOVE … ITC compounded at cagr of 27% from 1995 to 2011

  1. ** High Leverage Magnifies Good and Bad performance ** . Since most financial companies are leveraged ) some even > 10 X, their price can fluctuate dramatically … Classic case is Citibank valuation pre 2007 and post 2009 . This 100X kind of movement can make or destroy portfolios .

Hence one need to follow strict position limits and ensure portfolio is well diversified …

  1. ALM Mismatches – Asset and Liabilities duration mismatches destroys traditional as well financial companies . but problem with financial sectors is buyer freeze and leverage can create much bigger headaches … This further is compounded by difficulty in Assets Quality valuation in financial sectors – Manufacturing assets and brands can valued based on future cash flows – but financial assets cash flow is based on client ability and intention to pay which can be difficult to assess for new owner …
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I have been reading through several forums threads on financial services stocks . The views are pretty balanced … indicating bulls have still not thrown their towel … while bears are pushing hard their case.

I see we are in mid point of correction and final brutal fall is still some time away … Small tracking position can be explored … Big moves can wait …

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Is it time to buy Junk stocks again …

HPCL my old favourite is again coming down … In 2013 it had PE of 1 . and I aggressive bought it . Read my post above on the same …

Current EPS is around 47 … So ideally a pure value price will be around Rs 50 - Rs 100 range … Still long way to go … Waiting for it…

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All OMCs are quoting at much low valuations. Specially dividend yield is so attractive. can’t resist to load up in this correction specially BPCL and HPCL

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You need to wait till it comes in value zone . With decline in profits dividend will also reduce . I see dividend floor @ Rs 5/ share for HPCL and hence Rs 50 to Rs 100 will be good range to shop …

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@kb_snn… Yup!. Read your note above on HPCL. Congratulations, it was a terrific move and pick!

Its baffling to see the trio (HP,BP and IOC) lose over 40% of value in just a week. Only thing that we need to keep in mind is patientice!. There will be bounce backs, but need to wait patiently for that one large carnage to manifest and pick this stock up for sub 100 or 100-125.

In the last cycle, post your purchase how long did you ride the sideways movement? Even that needs patience and significant conviction!.

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OMC stock should be bought only if you believe that few of the following thesis will be true …

LONG TERM

  1. China & Europe will move towards electrical cars by 2023/25 reducing demand for Middle east oil . This will in turn drive down cost of oil and hence these OMC will earn normal profits

  2. India becos of strong Auto lobby ( Maruti in particular ) and RIL will move slower towards electrification - ( projection is we might not have good percentage of electric car till 2030 ) . This will mean till 2040 - replacement of old fossil cars - OMC will have good run

  3. OMC will enter in Gas supply business and diversify revenues –

  4. OMC real estate across cities is very valuable and they can be easily monetised …

SHORT TERM

  1. With each Govt intervention private oil retailers will exit the market giving PSU OMC - monopoly in there business

  2. PSU Oil companies will able to strike deal with IRAN to continue oil supply at lower rates that too in Rupees

If you believe few of above thesis will unravel then entering OMC with good MOS ( as stated by me ) is good strategy .

I have enclosed a pdf of my tradebook in my HPCL post wherein you can see how much volume I bought that various price level … From initial price that I bought price was down by near 50% … the entire period was more than a year …

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Just re-read your initial post and also saw the Tarde Book!. Thanks for sharing this. Good you struck to your conviction. It finally paid off.

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RIL has made significant inroads into retail (1300+ pumps lats quarter - They have the largest throughput per pump across all players), has large ATF farms outside of many major Tier-1 and Tier-2 airports, Bulk LPG etc. Need to see how this pans out over the next 24 months in a re-regulated environment - given the macro challenges and state / central elections

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RIL has 3 interesting portfolio of business

  1. Declining – Refining Oil - This segment they will try to milk as much as possible as possible till 2030

  2. Maturing & Moat business - Petrochemicals - In this segments they have several chemicals where they are near monopoly or have strong Market share . This will continue to give them strong cash flows till PSU OMCs is ability to challenge with cost effectiveness ( which currently is less likely )

  3. Future Business - Here RIL is trying to be NETFLIX + AMAZON of India … Telecom is just distribution pipe for them … This business both retailing cum entertainment has long term potential …

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Risk of being Bull in bear market when liquidity dries up … from Wikipedia

The crash of 1865

As per the Business Standard, India experienced its first stock market crash in 1865.[6] Although the Bombay stock exchange had not yet been formed, Gujrati and Parsi traders often traded shares mutually at the junction of Rampart row and Meadows street. In the preceding years, speculation about the results of the American civil war had led to irrational increases of stocks of new Indian companies. Shares of the Back bay reclamation (face value Rs. 5,000) touched Rs. 50,000 and those of Bank of Bombay (face value Rs.500) touched Rs. 2,850. Money made from cotton was pumped into the stoc market driving prices of stocks higher. Banks loaned money to speculators further fuelling the bull run and wealthy merchants like Premchand Roychand dispensed advice that led to ordinary people placing their bets on shares.[7]

On 16 November 1864, the governor warned civil servants not to participate in the current frenzy. New companies were floated with new share issues publicized in the newspapers. Forward contracts further promoted speculative purchases. However, the market crashed in May 1865 when the civil war ended, causing cotton prices to fall. Shares of the Backbay reclamation fell by 96% to under Rs. 2,000 and a number of merchants including Behramji Hormuzjee Cama went bankrupt.[8] The crash not only led to a dwindling of the financial fortunes of many, it also led to a decrease of the city’s population by 21% due to the closing down of many enterprises.[9] On 1 July 1865, when hundreds of “time bargains” had matured (as the future contracts were then known), buyers and sellers alike defaulted leading to the burst of the bubble. A share of Bank of Bombay which had touched Rs 2,850 at the peak of the market slumped to just Rs 87 in the aftermath of the bust

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I think at CMP most of the negatives are priced in. Moreover oil tax is the cash cow for government, its going to support India’s growth story and for time horizon of 5-8 yrs from current levels it could create huge wealth.

With very conservative estimates, If I look at BPCL on consolidated level,

  1. It has cash and investment worth 25k cr
  2. Net Fixed Assets of nearly 40k cr
  3. Annual cash flow of about 8k to 10k cr( lets assume it gets reduced to 5k cr due to re-regulation)
    so, in total it is worth 70k cr(25+40+5) without any growth and it is trading at 57k cr market cap.
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