Calibrating Exits from your Big Winners: Necessary? Models exist?


(Administrator) #41

Hi Guys,

Its apparent that many folks (probably new to ValuePickr) are having a hard time coming to terms with the hierarchy of Valuation Concepts that are being laid out.

Before cluttering an important thread with too many counter-questions, it is recommended that anyone participating in the thread, please familiarise yourselves(do some thinking)with following important reading pieces (in that order):

1.Capital Allocation Framework

2.Business Value Drivers

3.ART of Valuation

These are “distilled wisdom” pieces from our Seniors (may not stand the highest academic rigour) but are at the heart of ValuePickr process. And we believe, at the heart of its performance skill and success (apart from the big chunk of Luck that is necessary).

We hope all participants going through above - will substantially improve discussion quality again - because it will help bring everyone on the same page! It will help avoid “irrelevant” and out-of-context posts that hinder the discussion flow.


(Donald Francis) #42

The only counter-thesis to this that I can think of is, what if Astral (or other such high-fliers) goes up to 60-70x earnings but continues to grow at 40-50% for next 2 years?

Obviously if that scenario comes to pass - the stock will cease to capture 3+ years forward earnings and will veer towards more reasonable if slightly-overvalued valuations - which everyone would be happy to stay put in.


(Sagar Saxena) #43

That was exactly my point.


(ricky76) #44

Donald,

I am not sure whether PE on trailing earnings ( as mentioned in your initial post) is a suitable metric for gauging over valuation. To give an extreme example during July 1932 when the great depression bottomed many stocks were still quoting at PEs of >30 on a trailing basis as the earnings were extremely depressed during the depression. All of them went on to give spectacular returns as the economy started normalising.

I am not by any means saying that earnings during 2010-2013 were really depressed but the point is what matters is the future and not the past. Cera, Astral and others of their ilk have delivered outstanding earnings growth during a time when there was a serious housing/infra slowdown and many other businesses were struggling. What could they possibly do when India’s growth normalises and infra/housing and other sectors really take off? The market is apparently saying A LOT hence the rally. For someone to sell these names now would mean taking a negative view of the extent of opportunity ahead or the ability of the company to realize it. Either way looking at trailing earnings is unlikely to lead to any answer.

As some of the forumers have mentioned, short of a buying climax/frenzy ( which we will all hopefully recognize!) where it is best to exit one needs to look at the opportunities ahead with a businessman’s perspective and not get stuck up on numbers such as PE, NAV etc.

Of course, if one is a true value investor in the mold of Seth Klarman and such then it is best to exit once the stock ceases to be undervalued. This formula though in my view would be a disaster in the Indian context where the strong get stronger and the weak ones disappear.

I would also be cautious in assuming that FMCG businesses such as Colgate, ITC etc are perennial, infact I am inclined to think they are the ones at the greatest risk as competition heats up and the Indian supermarket starts to resemble a US or Singapore one with a wide choice.

Bobby


(Pankaj J) #45

I

So

So

2008-2009 was a black swan event… should we plan an exit strategy with keeping that event in mind. That even might not come for many years and we will be loosing out gains in the intermediate period.


(TCX) #46

I think the point being made is about having a model, to be able to exit in time, before the market goes to crazy valuations.

We have had peaks/mania followed by big crash in 1984, 1992 (Harshad Mehta scam I was witness to), 2000 (dot-com mania) and the 2008 (crash that all of us must have witnessed). Bull Market peaks have followed roughly a 8 year cycle in India (now don’t kill me for that generalisation). So there is one round the corner, more likely than not.

The way markets are behaving today, all kind of stocks going up (with reason and without reason too). All signs are leading to a stage of crazy valuations, sooner than later, who knows maybe by 2016. or within 2 years.We seem to be able to rationalise that stocks like Astral will continue to deserve the 50x trailing valuations - that this will continue - should even get better!! no black swan event will be forthcoming, this time it is different :slight_smile:

But most folks seem to be unwilling to rationalise that Astral like stocks which are already seeing very rich valuations can also Reverse to the Mean - within 2-3 years or a P/E of 25-30. Everyone seems to think this is perpetual, and for keeps.

Time to get real. And be prepared to swing depending on how it goes. If valuations don’t go to extreme levels - great, don’t sell even marginally, that’s your call.

But if it starts/does go to extreme levels, there’s not much of a rational argument left about not progressively booking profits.


(Newbie) #47

This thread is very interesting for me, as I have been wondering what do about some stocks from VP Portfolio I was lucky to buy 2 years back.

Thanks TCX for making it clear for me - what I understood from your note

)- we must not take rigid positions - that the market will go this way or that.

)- there are good chances that the market may see crazy valuations pretty soon ( a budget on expected lines may spur the market to another high level, etc. etc.)

)- if it does start becoming crazier , start booking profits at every level

)- if it doesn’t I am happy to hold (anyways)

I agree we need some models to handle the extremes. I am happy to have a forum like VP where senior investors are taking this much pains to explain their stands. Thx a lot


#48

Hi

This is the data that i got from the book "The Thoughtful Investor" of Infosys during technology boom.

Year Price

Revenue

(crores)

profit

growth

ROE Market cap Trailing P/E

No. of

shareholders

March 31,1996 7.9 88 29.53% 356 16.9 6909
March 31,1997 16 139 60% 34.76% 731 21.7 6414
March 31,1998 57.8 258 79% 42.24% 2963 49.1 6622

March 31,1999

183.1 509 119% 54.16% 9672 72.7 9527

March 08,2000

intraday high

1726.1 92101 322.1
March 31,2000 1112.7 882 115% 40.83% 59338 207.5 88650
March 31,2001 510.3 1901 118% 56.08% 26926 43.2 46314

Septmeber 24,2001

intraday low

276.25 14586 18
March 31,2002 466.9 2604 29% 46.57% 24564 30.5 89643

(Arindam) #49

Thanks Pavan to take the trouble of sharing the data on Infosys.

The illustration has its purposes.

That the market can take a stock to dizzying highs from 50x trailing to 70x in a year to 300x in another year. The thing to note ofcourse is that

a) Infosys was growing at 60-80% in the journey from 20x to 50x

Astral has made that same journey from 20x to 50x on the back of 30-40% gropwths

b) Infosys grew at over 115% in the journey from 70x to 322x.

Infosys continued to grow at over 115% for the next 2 years in the mean-reversal to 200x and 40x

c) The craze really built up over 2 year 1998-99 and 1999-2000. The reversal to the mean came much swifter within a year to 40x while still growing at 120x and crashing to 18x in next 6 -8 months

We should think however if Infosys is the right example to take in our debate - just like Nestle wasn’t. Infosys was the IT bell-weather growing at those 80-100%+ rates right in the middle of the dot.com mania. IT and dot.com was the flavour of that bull run.

Astral perhaps is far from that stature as is perhaps “Housing” from leading the next mania - there are only a handful of players in the theme - I may be totally wrong :).

But is there any remote chance of Astral growing at 50% plus for next 2 years? What does the capacity expansion look like with the South factory?


(Mallikarjun) #50

Guys Infosys and other I.T co’s were addressing/catering to growth on a global/massive scale… And even now they are…

Comparing it with Astral doesn’t stand a chance i guess…

May be we have to have a macro and even stock specific exit model…

disclaimer - don’t track Astral in detail…

Regards

mallikarjun


(ricky76) #51

Regarding Info Sys- it is worthwhile asking whether the stock price would have gotten hit so badly had the dot com boom had not crashed in other words was it the high trailing PE that was the real culprit or the collapse of a major boom?

What matters in valuation ( fundamentals of DCF valuation) is both the growth rate and the duration of that growth however in normal times the stock market only values a company a few years out which is why buying a solid business such as Page Ind even at so called " fair value" yields good results.

Now we are seeing the market discount a few more good years hence the trailing PEs of some high performers seem dearer this is similar to what happened in the late sixties/ early seventies with US blue chips known as Nifty Fifty that were all trading above 50X trailing, they did get their comeuppance in the crash of 1973-74 and some of them such as kodak languished for years while other such as IBM rebounded.

Ultimately what matters is the fundamentals of a specific business, if one is convinced of that then it is easy to average down during corrections.

Bobby


(Kunal) #52

As a value investors, it’s logical that we worry for highly valued companies. One can clearly see two different sides of opinions here. The discussion has not yet come to logical conclusion but I think EXIT strategy depends on personally expected return and risk taking ability.

We have several options to deal with EXIT,
(we assume business is still fundamentally sound but just valuation has gone through the roof)

  1. If we are long term investors (which is basic element of value investor :slight_smile: ) and believe in better economic growth prospect ahead there is a**SERIOUS SOLUTION.**Please check attached file.
    Why not increase our total fund size and indirectly lessen exposure to said business. With new fund, new opportunity is satisfied while existing business weightage will decrease. This is not the case always but certainly when economic growth prospect looks better. Poor business must go but sound business deserve the space.

  2. Trim exposure and sleep with peace of mind

  3. Sell completely if we think party is about to end and better opportunity is available.

In most of the cases, I am not interested in option 2,3 unless performance takes divorce with valuation.



(Donald Francis) #53

Think both sides have had ample opportunity to present the case.

In investing there is no right and wrong. Nobody has a crystal ball. Just because something worked in a certain way last time, does not mean it will this time, or it may not.

It is our duty as a responsible community to keep up the ante as better-informed investors. To help everyone come on the same page in terms of data-analysis-actionables. To help everyone see through the data/evidence presented in the right context. To help everyone see the RISKS more clearly. So we don’t play blind (due to uninformed over-enthusiasm) but play solid with our own hand-crafted strategies in place.

As Kunal says, follow a strategy that helps you sleep in peace. It is also good to remain OPEN to contrary ideas than our own - so we can remain flexible and adaptive to this new phase of markets.

I am sure this discussion has helped everyone get a more rounded perspective on the subject. It surely has done that for me; and I will keep questioning seniors and investing legends for more insights on to this nice puzzle - which perhaps no one can have a perfect answer to.

Let’s keep revisiting this subject from time to time. If the market keeps heating up as most of us expect it to, we might have another shot at it when Astral crosses 60x or 70x, what say?

That will be a swell moment!


(Pankaj J) #54

I don’t have astral so i am not biased… :)… what i am trying to say is that if we remove the 2000 year data ( boom and bust ) then how does the story looks. Someone one buying in 1998 at 50 PE will still be in a good position during 2001 or 2002. So even with 50 or 70x the stock did deliver…If someone cashes out at 50x or 70x then is he playing the waiting game for that boom or bust even which might or might not come. Again goes to basic question or to portfolio allocation question as to how much invested you should be ?

Price |

Revenue

(crores)

|

profit

growth

| ROE | Market cap | Trailing P/E | March 31,1996 | 7.9 | 88 | | 29.53% | 356 | 16.9 | 16 | 139 | 60% | 34.76% | 731 | 21.7 | 57.8 | 258 | 79% | 42.24% | 2963 | 49.1
183.1 | 509 | 119% | 54.16% | 9672 | 72.7 | 9527

March 08,2000

intraday high

| 1726.1 | | | | 92101 | 322.1 |
March 31,2000 | 1112.7 | 882 | 115% | 40.83% | 59338 | 207.5 | 510.3 | 1901 | 118% | 56.08% | 26926 | 43.2 | 46314 |

Septmeber 24,2001

intraday low

| 276.25 | | | | 14586 | 18 |
March 31,2002 | 466.9 | 2604 | 29% | 46.57% | 24564 | 30.5 | 89643
| | | | | | |


(Gautham U) #55

Sorry guys. I dont have anything meaningful to contribute to this quality thread. Equity investment is certainly not easy… I do agree that it would be very difficult to sell and then get back in at a lower price point. Because you dont know when to enter again. But considering the valuation, we might have a prolonged time based correction till earnings catch up or even price correction on an earnings disappointment. What is scary is that every other stock ( even ones that have no earnings, poor balance sheet) is going up daily.For now, I have decided to hold and wait for for results. Earlier, I was looking at historical P/E of the the company. Now I tell myself that if PEG is around 1.0, its not overvalued. Hoping that, the earning will grow around the same rate and making the stock cheap again.

Recently I sold blue dart at 3200. I thought I was smart. But now its at 4300 trading at a P/E of 81.


(Madhu P V) #56

[ Comment too short ]


(Madhu P V) #57

dear rohit chauhan

In my own humble layman view i see that all seasoned investors view sell decisions as all or none phenomenon… and once & for all event.

since, neither growth nor moats are static events, we can always re enter our favourite stocks once valuations become comfortable , or growth returns, or a fresh moat is established

so selling is not so difficult if u r not biased about reinvesting in the stock

regards


(Madhu P V) #58

dear all,

are we in a position to price in the 100 cities concept in all our earnings calculations over next few years.

then, pipes or autos or ceramics etc would be worth a lot

may be , present valuations have are trying to factor in that kind of growth


(Niraj Kumar) #59

More than when to sell to maximize return i think it is better idea to have a fixed personal financial goal and expectation and if one goes closer to it , it is better to sell and wait in the side lines. Irrespective of size of opportunities i dont think stock like Astral or Mayur deserve to trade at PE of 30 or more by any stretch of imagination as they are mostly into commodity type business with hardly much pricing power. These kind of business should be selling at PE of 10-15 at most and i believe in due time they should trade at those valuation. It may not mean that overall market is overvalued and still many companies my outperform as they are undervalued. Most of FMCG, Consumer durables, Pharma, IT , agri based stocks, Mayur/Astral/ Relaxo kind of stocks etc looked overvalued. Some stocks among these can do well but most of them likely to underperform for 3-5 years time frame. Considering size and nature of indian economy we cannot have so many dollar billionaire market cap companies. Greed is enemy of rational investor.


(Navtej Singh) #60

I agree with you as these processing business grow in line with additional capital and then reach a point where each unit of capital give reduced sale per unit means marginal utility of capital reduces with time. It is just that we need to spot them early and get out something i am not very good at , therefore growing business with less capex requirement in midcap and small cap are great for me