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

[rohit1889]

Basant Maheshwari in his book “The Thoughtful Investor” has mentioned that whenever a sector has tailwinds, we shouldn’t sell the stock inspite of the overvaluation as whole sector is in bull market & valuations can grow to crazy levels and for bull market, 40-50 ttm p/e is not crazy level IMHO. According to him, one should sell a bull market leader only when the sector shows sign of topping out. “Building products” as a sector is in a bull market & i doubt than the bull market will top with leaders at just 2-4k market cap.

One can take cues from the book for the same.

[nirajiitkgp]

Rohit if thats the case he should name the book as thoughful or may be lucky trader/speculator and not investor. Few good peaks in a decade can give u some money but not neccessarily make one market expert. Think about pidilite , it is among best companies in india with pricing power and monopoly in its segment and around for many decades with excellent management and promoters still it has market cap of less than 3 billion dollar. Valuation can go rich for short term but eventually it will fall as the case of TV 18, Pantaloon, Educom and likes we have seen in past few years. Challenge is to the sustain created wealth for long term.

[Anant]

Great thread. I have been pondering over this for sometime and find myself still unsure. But there are a few things that keep on emerging and I seem to have formed a view on certain aspects.

Investment is a relative exercise: Firstly I do not agree with the view that one needs to continuouslly hold on to traditionally known good stocks. I firmly believe that investment is a relative exercise and if there is a better (much better) opportunity present there is no reason for someone to hold on to a weaker investment just because it was traditionally good.

DIstinction between capital and returns: Assuming that capital gains are taken care of a psychological problem that I see is the distinction between capital and returns. People are more comfortable losing out on returns (future or current) when they are sitting on an already appreciated stock rather than investing in a newer stock with lesser risk. Strangely as soon as the money flows from an older appreciated stock to a newer one it starts getting treated as capital again. Personally I would like this difference between capital and returns to be minimum.

Exit on an arbitary high cut-off: I do not think there could be a generic exit model for all companies except some arbitary high cut-off. It could be an X P/E (for me X is 50) ratio or a reverse DCF based analysis as Kiran pointed out. I do agree that this might result into exiting some of the most rewarding investments (tech stocks during 80’s and early nineties) but I would rather work in an arbitary controlled framework rather than hunting for an outlier.

Waiting for the arbitary high cut-off: What are the characterstics of companies which qualify for the arbitary high cut-off? I think innovation is the only criteria.

a) What kind of patents/IP the company has? What has been its track record in coverting this IP to viable products?

b) Does the company have sufficient distribution/manufacturing strength along with a brand(for better margins) to keep pushing newer products into the market? Is the company capable of creating an eco-system of products? Most FMCG companies do this but I have seen fewer companies in non-fmcg section succeeding here. Some of the nn FMCG companies who have succeeded here are Pidilite, Motherson Sumi (Can Astral be one of them?)

c) Market-size and the industry. Atul auto in my view has little scope of crating an eco-system of products.

Out of the VP portfolio I think there Kaveri, Shilpa, Polymed do qulify for the arbitary high-cut off. I am not sure of Ajanta/Alembic as to where they stand. SCUF, ATUL and Avanti do not. I do not track Astral closely but I do see them introducing a basket of products in plumbing/electrical areas and see them qualifying.

[Administrator]

Niraj Kumar,

Everyone is entitled to freely express his/her opinion on matters of investing strategy and/or a business in particular at public forums like VP. However resorting to Personal Attacks is NOT DONE!

One of your lines in a post above was flagged off by many Members as a personal attack speculating on someones sources of income.

The offending line has been edited out.

As responsible community members, let us all remain vigilant and conscious of not crossing some lines that shouldn’t be crossed.

[nirajiitkgp]

Admin,

Sure my intent was not to do any personal attack on anybody or hurt feeling of anybody. I feel sorry if my expression of viewpoint is bit harsh and express my regret if some members felt like that. My only point is nobody claim to be expert of stock market and simply because somebody has made some money through stock it does not mean we need to blindly follow his advise or methodology or that those methodologies is necessarily right. Same type of investment style never works for long in stock market and even Warren Buffet with his methodologies has not succeeded in beating S&P index return in last decades. We must be open for criticism while discussing about individuals and not encourage culture of workships.

[nirajiitkgp]

I was just looking at google screener and screener.in and both of them for market cap greater than 6000 cr INR (about 1 billion dollar) returns about 200 results. Indian economy size currently about 2 trillion dollar and stock market is reasonably valued. Even if we assume that indian economy is going to grow by 7 % for next 15 years (by 2030) our economy size going to touch around 5.5 trillion dollar (i feel it is very aggressive growth assumption and historically india has not grown for more than 5-6 % rate except during brief period of 2004- 2009). So if we extrapolate past pattern we can have about 500 companies with billion dollar market cap by 2030. So its really very tough ask for companies to sustain market cap of 1 billion dollar unless they have global market to address and currently except in generic drugs and IT service industry India as a country dont have capabilities to match global standard. Real estate and construction industry is always in high demand in india but still it failed to create many value creating companies so far.

[nirajiitkgp]

Now if we assume past historical data of 15 years, US dollar get devalued by about 50 -75 % so in real terms based on current purchasing power basis, we can hardly have about 300 companies by 2030 with market cap of more than 1 billion dollar. Indian INR value becomes half in respect of US dollar every 15 years (for example 1 US dollar = 32 INR, in 1999 while in 2014 it is around 60). So all investors in indian market has to increase their money by 4 times just to maintain current purchasing power of their money in next 15 years. So we need lots of luck to get good share return and increase our purchasing power.

[dsv2999]

Hi,

Donald thanks for imitating the discussion.

I will share my experience on 2 counts. One as outsider and later as an investor.

Year 1999-2000, stocks were at their peaks. And there used to be articles in the newspaper every other day on how still infy can be bought. And infy was quoting at 100+PE. They were using all kinds of models like PEG and forward valuations. And things were looking cheap for all those analysts. And everyone knows what happened after that.

Bought a stock named Donear industries in the year 2003. Reason for buying was typical value parameters but it was faltering on growth. But was expecting valuation to catch up and growth may also come by. GDP of the economy was picking up. Environment was very similar to what we are having in the last 6 months. We were coming out of pessimism. And things were moving with reason or without reason.

Donear performed on the expected lines for the next few years. In between it corrected several times even by 50%. But still I hanged on to it.During the period stock gave 2 bonuses (1:1) and 2 splits. After the bonuses and the splits the stock was quoting at 90rs. Suddenly it stopped moving and others were moving.

One of my friend suggested another stock named Ankur drugs. Stock was fulfilling my most of the criteria and with very high chances of doubling in a yeas time. I started contemplating about shifting. And during this period Donear fell from 90rs to 70rs. Soon stock moved back to 90rs. I started selling slowly. And then the company sold stake to Citi investments for their expansion needs.

News came out and the stock did not even buzz. I kept on selling. And then stock started moving upwards. By 130rs I have sold out everything.

The stock topped out in next 8 days at a price of 240rs and listed on the exchange as the top traded counter consecutively for 2 days.Later company could not manage the expansion well. And in the year 2008 stock fell to 15rs. As of yesterday it traded at 18rs.

Instead of just numbers tried to depict what plays on the mind and how person typically behaving in thosecircumstances.

Some examples of the previous period could be Hercules Hoist, opto circuits and modison metals which I followed closely. they may not be similar to the current VP stocks but definitely can give insight about the trajectory a stock can follow.

Lessons learned:

)- It is always easy to ride your pony then to ride a new horse

)- Should be in control of emotions (even if a stock makes 2 consecutive upper 20%)

)- Have a model in place (without a model felt stock made a good run from under 3PE to 25PE and worth selling)

I will go with Donald for a stock overvaluing between 3-5 times forward PE

May be 3 times for a 30% grower, 4 times for a 40% grower and 5 times for more than 50% growth.

thanks to all the guys for bringing clarity.

[Vedant]

Hi,

An interesting twitter discussion by Prof Bakshi.Astral is mentioned towards the end.

Sanjay Bakshi (Sanjay__Bakshi)

Its imperative to check P/E after arriving at adjusted earnings. I remember Ayush mentioning that Astral’s forex loss from the ECB loan part should also be adjusted.

This is not about Astral, but just want to point out we probably need more understanding on reported earnings and “real” earnings.

Cheers

Vinod M S

[naveen_g77]

Hi

Very interesting and pertinent discussion. I have just joined sometime back and hope to learn a lot from the seniors in this board. My few cents:

1. When we look at the trailing PE we should see the stage of the market cycle we are in currently. If we are in the third stage of the bull market then a PE ratio of > 25 might be a sign of overvaluation but if we are in early second stage of bull market then a PE ratio of 22-25 might just suggest that hopes are running ahead of earnings and once the earnings start kicking in the PE ratio can drop to even 16 in next 6 months.

2. Speed and capability of management to scale up is very important to evaluate a company. That is why Blue Dart gets high PE of 80 as market thinks it can scale up very fast due to size of opportunity, capable management, low capex requirement. In the last bull run of 2003-2008 Indiabulls went up from Rs 20 to Rs 2000 as they could scale up very fast.

3. There are very few companies in India that are recession proof and can qualify for buy and hold for long time of 10-20 years like HDFC, Titan, Lupin and we should not compare every company with them as moats get attacked over time, market cycles, business challenges etc. (Disclosure I am invested in Titan and Lupin)

Regards

Naveen

[theashworld]

[quote="Donald, post:1, topic:70157170"] > I am sure if this has been a question with me, it must be with a lot of readers at ValuePickr too. > > What to do with stocks like Mayur quoting at 28x trailing or Astral (49x trailing) or even an Atul Auto (20x trailing)? > > While a Hitesh Patel would advise - you must keep rising your winners - the rational mind has to question for how long? Who ever (amongst us holding Mayur or Astral) had ever thought that these businesses will quote at ~30x or ~50x respectively?? and this - Not at the peak of a raging Bull Market, but at the nascent starting phase of a Positive Phase in our markets?? > > Model for Exiting > > In 2009 we worked out a for Exiting the at crazy highs (didn't have one in 2008 and remained hopelessly fully-invested; got saved because I was primarily in large caps, but paid huge Opportunity Costs; please read original article for detailed insights) > > CNX NIFTY > > (Jan 1999-Sep 2009 > > Mean +1 Std. 68.27% of Values: Unusual Mean +2 Std. points - Outside of 95.4% of Sample: Extraordinary Extreme points - Outside of 99.73% of > > The CNX Nifty peaked in February 2000 at 1800 levels and at PEs of 27+. It peaked again in January 2008 at 6200 level, and at PEs of 28+. In the last 15 years in study, market has always crashed badly while crossing NIFTY PE 26. > > Those interested can keep track of NIFTY P/E, P/B and Yields at data. Nifty P/E is trading at between 20-21 currently, it is time to put your "cautious specs" on, but is probably still far from crazy at which time anecdotally we will have many other indicators A Times of India front-paging stock markets, Lakhs of Demat accounts being opened daily, and every idle conversation relating to the state of the stock market! > > what about a model for existing Individual Stocks? Don't we need > > So coming back to my main quest for over last 2 months. As mentioned before, markets haven't reached crazy valuations, but maybe some of our stocks will, even before the markets go real crazy ?? > > As Astral climbed from 30x to 40x and now almost 50x trailing earnings, my belief is stronger we desperately need a model here too. We booked 20% profits at 30x in Astral, but kept asking every senior we knew on clues how to handle this situation - not with rigid academically-set thresholds or set on holding perennially (surely an Astral doesn't belong there), but something more pragmatic?? While still having the discipline to leave some on the table?? > > Some of the commonly held thoughts from a number of senior investors polled by us may provide us some clues. Shared below for provoking more investigation and experience sharing among us. > > is Astral priced where it is, > > Supposing you are a Fund Manager looking at India and just raised 200 Crs. > > Your mandate is to invest in small and medium emerging businesses with Sustainable Growth for 5-10 years as your investing cornerstone. You are ready to hold through some amount of over-valuation since its too difficult to get back in, in current state of markets. What will you be doing? You will probably come up with a list of 20-25 quality names, and then you size up each on Size of Opportunity, Quality of Management, Quality of Business, and the like.... > > You get the point. Its the same set of quality names that are getting chased around. There is probably some merit in this thinking - much more than lazily ascribing "Astral is the new Page Industries for this market" )- far from it !! (But that's another topic for another day). > > A pretty commonly heard refrain these days (in these markets) is Re-Investment Risk. As mentioned before as a Fund Manager or serious individual investor you are pretty okay to hold through some amount of over-valuation, especially as the cost of getting back in is steep? > > Besides a more important consideration should be Risk Mitigation? You may not care so much what happens to the rewards (say but you probably must make sure that you are NOT ADDING to the Risks by switching to something else? (You sure are not going to sit out on the sidelines from these levels, right?). Some statistics were flung at us saying its statistically proven your odds are 55:45 in making the right switch. That 45 times out of 100 you go wrong in these situations. If the ODDS are that close, why take the Risk, why not stay invested and ride the winnings? > > Especially as we are NOT talking about XYZ businesses, but quality businesses that we have followed closely over last 3-4 years, have seen them walking the talk, are comfortable/happy with the Management and most importantly see sustainable growths ahead for not just 2-3 years, but probably more than 5-10 years on. There are fewer variables in these businesses, extremely difficult for a new player to emerge and challenge the niche dominance, and Management has just got to keep executing - in an economy that is probably set to grow stronger in the days ahead? So, why quit?? > > the logical question will be - where and how do you draw the > > There are some wonderful companies in VP Universe like Ajanta Pharma (~47% PAT CAGR over last 3 years) and Kaveri Seeds one better (~75% PAT CAGR over last 3 years) that that kind of growth ensures these companies play an Overvaluation-Undervaluation catch-up game - all the time! > > And obviously there is NO DEBATE about what to do with these companies > > However it becomes more complicated - when the growths hover around ~30%, the market chases that kind of quality sustainable growth (when discovered) like it is in Astral or Mayur? And the undervaluation catch-up might not get the chance to play out over extended timeframes? > > I am not that easily satisfied by above. Then I have only one weapon to throw - So where would you draw the line for an Astral or a Mayur? you still be comfortable (with the above hold-perennially kind of line) if these run up to say Astral 70x and Mayur 50x It's possible isn't it, and would you still say ride your winners, or?? > > The question to ASK is how many years earnings are being captured today in the > > ** ** > > And Voila! I think there we have the Model we needed? > > | YEARS OF EARNINGS - CAPTURED IN THE PRICE TODAY?? > --- > > FY14 PAT Growth > > | > > 1 YR FWD PE > > | > > 2 YR FWD PE > > | > > Future/ Normalised PE Band > > | > > Price Capturing xyrs ahead > > 0 > > Alembic Ph [/quote]

Personally I review my portfolio every year and assume that I have the entire amount as liquid cash. Then I start fresh and allocate the amount based on current valuations and my methodology. Whatever doesn't fit the criteria is thrown out.

It is critical to avoid ownership bias. Just because you owned something at a low price doesn't mean you have to keep holding or sell it. In fact the whole point of confusion arises because of this. In the extremely ideal scenario you would have the ideal allocation every single day based on your methodology, practically, you need to do this periodically - every Q or every year or some other such criteria. if you do not learn to keep emotions out of this business (in this case emotions are that of falling in love with the stock or management), you're bound to confuse yourself and become your own worst enemy.

I observe that many valuepickr discussions start off as value based with a healthy dose of skepticism (quite justified) and then become growth based where people are willing to write fiction using spreadsheets to justify the price. I personally find much more peace of mind to just stick to one ideology and be honest with that.

I also think it's weird when people woe the fact that they sold off too early. Either it means that they didn't follow their own system in which case they are themselves to be blamed or they exactly followed their system in which case they probably made a good enough profit. But now they are blaming themselves for missing the market's upside irrationality of the stock price? Wake up.

Statistically-Informed Markets?

Model Market Link: 259065851 P/E P/B Indication Action Mean 17.72 3.71 Median 17.58 3.69 Mode 14.31 2.38 Std. Dev. 3.64 1.05 > Dev.21.36 4.76 Outside ValuationTime to get Cautious > Dev.25.00 5.81 Extraordinary ValuationTime to Sell > Mean+3 Std Dev. 28.64 6.86 Outlier, SampleTime to Exit fully

NSE India Indices Link: http://www.nseindia.com/products/content/equities/indices/historical_pepb.htm so valuations- .

But one?

Why today?

Re-Investment Risk?

),

Then line?

. Will trailing?

Hmm! Price?

Business	CMP	Trailing PE	FY15E Growth	FY16E Growth	FY15E EPS	FY16E EPS
Mayur	372.45	28.26	30.19%	30%	30%	17.13	22.27	21.74	16.72	18-20x	1
Astral	675.6	49.18	29.70%	30%	30%	17.86	23.21	37.83	29.10	20-22x	2
Ajanta	1514.9	24.21	118.41%	30%	30%	81.34	105.74	18.63	14.33	22-25x	0
Atul Auto	535.5	20.12	15.01%	15%	20%	30.61	36.73	17.50	14.58	12-14x	2
PI Ind	329	24.37	90.71%	25%	30%	16.87	21.94	19.50	15.00	20-25x	1
Kaveri	722.25	23.60	62.14%	30%	30%	39.79	51.72	18.15	13.96	20-25x	0
PolyMed	503.35	25.73	79.07%	25%	25%	24.45	30.56	20.59	16.47	20-25x	1
Shilpa	418.55	19.05	75.94%	25%	40%	27.47	38.45	15.24	10.88	22-25x	0
Avanti	696.55	9.09	131.04%	30%	30%	99.64	129.54	6.99	5.38	8-10x	269.85	21.35	51.35%	30%	30%	16.43	21.36	16.42	12.63	20-25x	0
SCUF	1415.2	2.86 BV	15.91%	25%	25%	109.85	137.32	2.41	1.99	2x-3xBV	0
Page	7407.5	53.95	36.66%	30%	30%	178.5	232.04	41.50	31.92	30-40x	2
Nestle	4936.7	43.37	-0.02	15%	20%	130.9	157.07	37.72	31.43	30-40x	1
PGHH	4258.35	52.42	29.90%	25%	25%	101.5	126.92	41.94	33.55	30-40x	2
TCS	2399.55	25.67	44.49%	30%	30%	121.5	157.99	19.74	15.19	25-30x	0
TechM	2125.7	16.39	135.19%	25%	25%	162.14	202.67	13.11	10.49	20-25x	0

[theashworld]

[quote="Donald, post:1, topic:70157170"] > I am sure if this has been a question with me, it must be with a lot of readers at ValuePickr too. > > What to do with stocks like Mayur quoting at 28x trailing or Astral (49x trailing) or even an Atul Auto (20x trailing)? > > While a Hitesh Patel would advise - you must keep rising your winners - the rational mind has to question for how long? Who ever (amongst us holding Mayur or Astral) had ever thought that these businesses will quote at ~30x or ~50x respectively?? and this - Not at the peak of a raging Bull Market, but at the nascent starting phase of a Positive Phase in our markets?? > > Model for Exiting > > In 2009 we worked out a for Exiting the at crazy highs (didn't have one in 2008 and remained hopelessly fully-invested; got saved because I was primarily in large caps, but paid huge Opportunity Costs; please read original article for detailed insights) > > CNX NIFTY > > (Jan 1999-Sep 2009 > > Mean +1 Std. 68.27% of Values: Unusual Mean +2 Std. points - Outside of 95.4% of Sample: Extraordinary Extreme points - Outside of 99.73% of > > The CNX Nifty peaked in February 2000 at 1800 levels and at PEs of 27+. It peaked again in January 2008 at 6200 level, and at PEs of 28+. In the last 15 years in study, market has always crashed badly while crossing NIFTY PE 26. > > Those interested can keep track of NIFTY P/E, P/B and Yields at data. Nifty P/E is trading at between 20-21 currently, it is time to put your "cautious specs" on, but is probably still far from crazy at which time anecdotally we will have many other indicators A Times of India front-paging stock markets, Lakhs of Demat accounts being opened daily, and every idle conversation relating to the state of the stock market! > > what about a model for existing Individual Stocks? Don't we need > > So coming back to my main quest for over last 2 months. As mentioned before, markets haven't reached crazy valuations, but maybe some of our stocks will, even before the markets go real crazy ?? > > As Astral climbed from 30x to 40x and now almost 50x trailing earnings, my belief is stronger we desperately need a model here too. We booked 20% profits at 30x in Astral, but kept asking every senior we knew on clues how to handle this situation - not with rigid academically-set thresholds or set on holding perennially (surely an Astral doesn't belong there), but something more pragmatic?? While still having the discipline to leave some on the table?? > > Some of the commonly held thoughts from a number of senior investors polled by us may provide us some clues. Shared below for provoking more investigation and experience sharing among us. > > is Astral priced where it is, > > Supposing you are a Fund Manager looking at India and just raised 200 Crs. > > Your mandate is to invest in small and medium emerging businesses with Sustainable Growth for 5-10 years as your investing cornerstone. You are ready to hold through some amount of over-valuation since its too difficult to get back in, in current state of markets. What will you be doing? You will probably come up with a list of 20-25 quality names, and then you size up each on Size of Opportunity, Quality of Management, Quality of Business, and the like.... > > You get the point. Its the same set of quality names that are getting chased around. There is probably some merit in this thinking - much more than lazily ascribing "Astral is the new Page Industries for this market" )- far from it !! (But that's another topic for another day). > > A pretty commonly heard refrain these days (in these markets) is Re-Investment Risk. As mentioned before as a Fund Manager or serious individual investor you are pretty okay to hold through some amount of over-valuation, especially as the cost of getting back in is steep? > > Besides a more important consideration should be Risk Mitigation? You may not care so much what happens to the rewards (say but you probably must make sure that you are NOT ADDING to the Risks by switching to something else? (You sure are not going to sit out on the sidelines from these levels, right?). Some statistics were flung at us saying its statistically proven your odds are 55:45 in making the right switch. That 45 times out of 100 you go wrong in these situations. If the ODDS are that close, why take the Risk, why not stay invested and ride the winnings? > > Especially as we are NOT talking about XYZ businesses, but quality businesses that we have followed closely over last 3-4 years, have seen them walking the talk, are comfortable/happy with the Management and most importantly see sustainable growths ahead for not just 2-3 years, but probably more than 5-10 years on. There are fewer variables in these businesses, extremely difficult for a new player to emerge and challenge the niche dominance, and Management has just got to keep executing - in an economy that is probably set to grow stronger in the days ahead? So, why quit?? > > the logical question will be - where and how do you draw the > > There are some wonderful companies in VP Universe like Ajanta Pharma (~47% PAT CAGR over last 3 years) and Kaveri Seeds one better (~75% PAT CAGR over last 3 years) that that kind of growth ensures these companies play an Overvaluation-Undervaluation catch-up game - all the time! > > And obviously there is NO DEBATE about what to do with these companies > > However it becomes more complicated - when the growths hover around ~30%, the market chases that kind of quality sustainable growth (when discovered) like it is in Astral or Mayur? And the undervaluation catch-up might not get the chance to play out over extended timeframes? > > I am not that easily satisfied by above. Then I have only one weapon to throw - So where would you draw the line for an Astral or a Mayur? you still be comfortable (with the above hold-perennially kind of line) if these run up to say Astral 70x and Mayur 50x It's possible isn't it, and would you still say ride your winners, or?? > > The question to ASK is how many years earnings are being captured today in the > > ** ** > > And Voila! I think there we have the Model we needed? > > | YEARS OF EARNINGS - CAPTURED IN THE PRICE TODAY?? > --- > > FY14 PAT Growth > > | > > 1 YR FWD PE > > | > > 2 YR FWD PE > > | > > Future/ Normalised PE Band > > | > > Price Capturing xyrs ahead > > 0 > > Alembic Ph [/quote]

Personally I review my portfolio every year (or more frequently in case of such surprise bull runs) and assume that I have the entire amount as liquid cash. Then I start fresh and allocate the amount based on current valuations and my methodology. Whatever doesn't fit the criteria is thrown out.

It is critical to avoid ownership bias. Just because you owned something at a low price doesn't mean you have to keep holding or sell it. In fact the whole point of confusion arises because of this. In the extremely ideal scenario you would have the ideal allocation every single day based on your methodology, practically, you need to do this periodically - every Q or every year or some other such criteria. if you do not learn to keep emotions out of this business (in this case emotions are that of falling in love with the stock or management), you're bound to confuse yourself and become your own worst enemy.

I observe that many valuepickr discussions start off as value based with a healthy dose of skepticism (quite justified) and then become growth based where people are willing to write fiction using spreadsheets to justify the price. I personally find much more peace of mind to just stick to one ideology and be honest with that.

I also think it's weird when people woe the fact that they sold off too early. Either it means that they didn't follow their own system in which case they are themselves to be blamed or they exactly followed their system in which case they probably made a good enough profit. But now they are blaming themselves for missing the market's upside irrationality of the stock price? Wake up.

Statistically-Informed Markets?

Model Market Link: 259065851 P/E P/B Indication Action Mean 17.72 3.71 Median 17.58 3.69 Mode 14.31 2.38 Std. Dev. 3.64 1.05 > Dev.21.36 4.76 Outside ValuationTime to get Cautious > Dev.25.00 5.81 Extraordinary ValuationTime to Sell > Mean+3 Std Dev. 28.64 6.86 Outlier, SampleTime to Exit fully

NSE India Indices Link: http://www.nseindia.com/products/content/equities/indices/historical_pepb.htm so valuations- .

But one?

Why today?

Re-Investment Risk?

),

Then line?

. Will trailing?

Hmm! Price?

Business	CMP	Trailing PE	FY15E Growth	FY16E Growth	FY15E EPS	FY16E EPS
Mayur	372.45	28.26	30.19%	30%	30%	17.13	22.27	21.74	16.72	18-20x	1
Astral	675.6	49.18	29.70%	30%	30%	17.86	23.21	37.83	29.10	20-22x	2
Ajanta	1514.9	24.21	118.41%	30%	30%	81.34	105.74	18.63	14.33	22-25x	0
Atul Auto	535.5	20.12	15.01%	15%	20%	30.61	36.73	17.50	14.58	12-14x	2
PI Ind	329	24.37	90.71%	25%	30%	16.87	21.94	19.50	15.00	20-25x	1
Kaveri	722.25	23.60	62.14%	30%	30%	39.79	51.72	18.15	13.96	20-25x	0
PolyMed	503.35	25.73	79.07%	25%	25%	24.45	30.56	20.59	16.47	20-25x	1
Shilpa	418.55	19.05	75.94%	25%	40%	27.47	38.45	15.24	10.88	22-25x	0
Avanti	696.55	9.09	131.04%	30%	30%	99.64	129.54	6.99	5.38	8-10x	269.85	21.35	51.35%	30%	30%	16.43	21.36	16.42	12.63	20-25x	0
SCUF	1415.2	2.86 BV	15.91%	25%	25%	109.85	137.32	2.41	1.99	2x-3xBV	0
Page	7407.5	53.95	36.66%	30%	30%	178.5	232.04	41.50	31.92	30-40x	2
Nestle	4936.7	43.37	-0.02	15%	20%	130.9	157.07	37.72	31.43	30-40x	1
PGHH	4258.35	52.42	29.90%	25%	25%	101.5	126.92	41.94	33.55	30-40x	2
TCS	2399.55	25.67	44.49%	30%	30%	121.5	157.99	19.74	15.19	25-30x	0
TechM	2125.7	16.39	135.19%	25%	25%	162.14	202.67	13.11	10.49	20-25x	0

[shankar_4602]

Market may definitely correct around 20% . There’s a lot of cheer of 30K being touched, discussions on FB have increased. More and more people are flocking to financial planners for MFs. Q3 earnings are not upto the mark for most midcaps.But the question is…should I sell the quality businesses like Kaveri,Ajanta,Astral,Shilpa just for this reason even without any deterioration in business. If business is doing fine and I have a 5+ years view, why should I be bothered if markets correct to even 22k or 24k. Its not easy getting a quality business at a reasonable price. And a major crash like 2008 is unlikely to happen or may be just once more in our lifetime. Next time is never like the last time. But we can’t stop spending time and effort just preparing for an event like 2008. Its futile, I feel.

[shankar_4602]

Market may definitely correct around 20% . There’s a lot of cheer of 30K being touched, discussions on FB have increased. More and more people are flocking to financial planners for MFs. Q3 earnings are not upto the mark for most midcaps.But the question is…should I sell the quality businesses like Kaveri,Ajanta,Astral,Shilpa just for this reason even without any deterioration in business. If business is doing fine and I have a 5+ years view, why should I be bothered if markets correct to even 22k or 24k. Its not easy getting a quality business at a reasonable price. And a major crash like 2008 is unlikely to happen or may be just once more in our lifetime. Next time is never like the last time. But we can’t stop spending time and effort just preparing for an event like 2008. Its futile, I feel.

[vnktshb]

Is it my imagination or is it true that ," Quality and quantity of discourse on valuepickr has gone downhill over the last 4-5 months?"

[ausking]

I have a similar observation. The “Stock Stories” table does not seem to have any new entrants. Does that mean, we don’t have promising new stories in the market to list here?

[karu_lamborghi_]

I have gone through the questions asked by Donald at the start of the post and even though it has been a long time and I feel there must have been sufficient opinions already discussed I felt that there is something that could be added .

[quote=“Donald, post:1, topic:1208”]
But what about a model for existing Individual Stocks? Don’t we need one?
[/quote] What I have always faced before exiting a stock is bias when I am thinking of exiting any opportunity. Hence I feel that it’s best to think of exit valuations or ranges for a company before doing the initial purchase itself.

Whenever, I am working on a company and factors which I need to study before making the purchase, I feel that many of those factors will be helpful than mere numerical/relative valuation multiples when wanting to exit a stock.

Why I think in this fashion is due to the fact that no two companies are similar in terms of characteristics before investing. Let me explain with an illustration:

Lets assume the core factors that go into consideration while buying a company are:

1: Scope of opportunity
2: Management
3: Past track record
4: Financials

All investments we make are like books where we are assuming the ending based on a premise that we have read so far. Our perception keeps changing based on the performance that keeps getting reported. Now when I buy a supposed company today after doing all my work I would be having a perceived value for the company in mind 5 years down the line assuming the factors that I have thought of play out as expected. For me, the scope of opportunity always assumes highest weightage and it also helps me in coming at a fair exit value for a company after a current time period. Now what will happen is that as time passes and our value gets realized and our follow on work of the company will help us in analysing as to how is the company building itself to with stand the various challenges that growth might present for it. If the business parameters keep improving (_which usually happens if the management is efficient) _ then we may take a call based on how things have changed and how has he company evolved. For eg: If someone would have analyzed Amazon as a book company and thought of exit multiples based on that they would have rued their whole lives.

So i am personal;y not a big fan of exiting companies based on exit multiples. Companies are evolutionary in nature and as they evolve they present a case to us which might be different than the one we would have thought in the first place. This I believe is the most important fact that goes into play while thinking of exiting.

[quote=“Donald, post:1, topic:1208”]
Re-Investment Risk?
[/quote]This question will become different when one thinks of it from a portfolio perspective. Every opportunity is relative and I believe their are always alternatives available to a person when selecting investments in different market conditions. The simplest answer if there are presence of no relative opportunities which from a risk return perspective would allow us to transfer capital from one company to another would be to then put capital in the next best alternative which in this case becomes cash.

[Vivek_6954]

Such a good thread full of investment nuggets.

Wish more activities on such good threads.

[harsh.beria93]

I have computed what would have happened if one were to simply invest equally in all the companies then

A few key insights:

• The portfolio massively outperformed Nifty (17.34% vs 3.16% in terms of price returns, ignoring dividends)
• The company which was trading at rich multiples was Astral Poly which was then trading at 49 P/E and is still trading at 50 P/E. All its returns (~22% total returns) have come from earnings growth of 22.38%.
• The highest returns of 45% IRR came from Avanti feeds, this was partly due to earnings growth of 30% and the rest from valuation re-rating.
• The worse returns was from Mayur Uniquoters (-14.55%) which came on the back of PE derating (-18%) vs earnings growth of 5%
• Also, the projected returns column shows how bad we are at forecasting!!!

In a nutshell, if one is sure of earnings growth of 20%+ over the next 5-years & is able to buy at reasonable multiples (20-25 times), odds are in their favor of generating >20% price returns. However, if one pays a fair multiple (20-25 times) and the company ends up generating <15% earnings growth, odds are against them to be able to generate >15% price returns as was seen in the cases of Mayur Uniquoters, SCUF, Kaveri, Atul Auto, Shilpa.

The excel sheet is below
Test.xlsx (11.9 KB)

[harsh.beria93]

There is so much focus on good companies, I am wondering if someone here has done a valuation exercise on crappy companies in the Indian context (question stated below). How do we decide exit from a crappy business? I would appreciate to have this discussion with real data rather than opinions. Thanks!

What happens to share price returns if one buys a company growing earnings at 5-7% at a very low price (say 5 times P/E or 0.5 P/B implying ROE of 10% i.e. close to cost of capital)?