Business growthwise, Gruh has a long way to go, no doubt. But will valuations keep growing at a decent CAGR as well? My guess is YES (that is if there is no general stock market collapse, of course)
āvaluations will keep growing at a decent CAGRā - when a mortgage lender trades at 16x P/BV. One of those things that are only ever heard in a bull marketā¦
edited for will
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@sarangg, you missed the word āWillā as part of that sentence. We will never know how the stock market behaves but one thing for sure is, if a business grows steadily and if it has management credibility, the valuation also grows (at whatever rate). You can check the stock price (valuation) history of HDFC & HDFC bank along with their business growth every year. That will give an idea. But then, when stock market crash like how it happened in 2008/09 happens, there will be a fall. Interesting to note is how the stocks bounced back post the lowest point in March 2009.
@sarangg
the āWillā is before the word āvaluationsā and not after it. The position of the word completely changes the intent.
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If a general market correction comes, never know how stocks prices will move. In bull market, valuations are at highs and in bear markets (2nd half of 2008 & 1st quarter of 2009), the valuations are extremely low, which is not fair as well
Sure. But, it is not advisable to act in one fell swoop. Gradual exiting, around 2% each week is suitable, like Systematic Dis-Investment Planning (SdIP).
Same for entryā¦ just because I think something is right, doesnt mean I will invest myself 100% in a week and wait for chest thumping celebration. Not advisable.
Gradual entry, gradual exit.
Investments are made in the companies that are the best in the given sector. I am not confident of investing in the second rung, because one cannot gauge whether the entry price was a good one; whether entry was at a good discount or were you the āgreater foolā.
Except for once in a decade cases, where you get a good company selling at historic lows. Then its is a no brainer. Like in 2015 Tata Steel, Hindalco were selling at 2008 lows. Some Banks too sold very cheap.
Complete exit if the share is priced to perfection or overpriced or making a gradual exit are all great talk, but very difficult to implement or get it right. In fact most of us make the mistake of not counting the opportunity lost, but simply look at a particular investment in isolation and end up in making this mistake of selling.
My learning is if the company is doing the right thing, the time to exit is NEVER irrespective of what price it is quoting.
My own experience on how I regret this mistake can help others to understand it. My average cost of Gruh from the 2008 was around 37. But when the price went beyond 200 during 2012 (P/B > 5), I slowly started to sell thinking that I can buy it back when it falls at an opportune time in the coming months or years. Except 10 shares, I sold all other holdings during Dec 2012. But the stock just went in one direction, and that is up. Thus I ended up losing the bonus allotment during 2014 and in fact the company would have ended up as the No. 1 holding if I have not sold it all.
It has been 5 years since I sold it and probably another 5-10 more years before I could buy it back again if at all the price corrects. Even then I would have lost out all the dividends and bonus shares in between. And I may have to allocate a bigger capital just to buy back the equivalent number of shares even when the opportunity comes up.
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If it is any consolation, then Iād say that when you sold Gruh, you would have bought into another good investment. That too must have done really well in this bull runā¦ so you are allowed to pine only partially.
If you sell Gruh, you will never be able to buy it back. It will always seem too expensive and you will convince yourself not to buy it and buy some other cheap stock.
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Lesson learned. Agreed that Gruh is a great stock and not to be missed at PE below 40 like it was for several months in the recent past. But, being enthu at PE 60 is another thing.
Biggest trouble with such stock holder is toggling betweeb enthu- non enthu position.
If one is in game for long haul, having entered at reasonable price, best option is to keep adding at every opportunistic time.
Many time simple approach over long term gives far better result than what one gets with highly complicated algorithm based approach. Only drawback is it deprives from happiness which few people get only from visibly hyper actions.
You are right on all counts. Providedā¦ Gruh Finance continues to be the stellar company that it is. Now, there are very few people who have the courage and expertise to do the following:
- Invest a significant percentage of ones portfolio in one company and hold for a truly long term.
- Monitor the company, the industry and competitors to make sure that the company is still stellarā¦ you ought to go completely in depth, because of point no.1
- At all times have the highest level of conviction in the company, as much as the promoter does, because in bearish times you will need it the most and without which 1 and 2 is not possible.
Point no. 1 is the crux. Because if you are investing only 2 to 5% in Gruh, then it does not really matter to the entire portfolio. But, if you are invested 10 to 30% then it is a completely different ball game, then you will need to have point 2 and 3.
Finally, I am not sure how many people, from non-financial background or with proper financial training are able to do 2 and 3. Because without pure conviction it is impossible, one wouldnāt hve the capacity to hold a stock for the long haul.
I fully agree with all yr three points.
For me it is 10+% of portfolio.
Key is remaining alert and aware not sleeping mode.
10% is much, especially at such a high PEā¦ unless you understand the industry completely well and are confident that you will get a Yield (EPS / Price of Share) of at 13% from the CMP.
If you are not a financial expert with years of investment experience and pedigree, then diversify to the best of your abilityā¦ spread your risk in good companies. Dont concentrate your investment. It will prove devastating when bears come.
I think dividend plays an important role in valuation of Gruh. At present it is at dividend yield of 0.55%. If the price were to be at PB of 5, it would be at div yield of 1.7% at which quality like Gruh would get lapped up very quickly. Also higher dividend payout keeps the book value growth in check which in turn gives high ROE.
Gruh is currently giving a yield of =
8.9 / 510 = 1.75%, very far from our expectation of 13%.
Lets turn to growth prospects:
EPS grew by 30% last year. Lets say it will continue to grow by 20% for the next decade. If I buy the stock now at CMP 510, and EPS grows by 20% each year, then in 2027ā¦ the yield will be around 11%.
So, I do not see the attraction.
I am fairly sure, in the next correction one will find many good companies which will give a yield of 11% at CMP or a near term forward EPS.
Most good companies that are well established hover around a PE < 20, that is a Yield < 5%. That is the starting point. And since they are on a growth path, they give a 10% Yield within the next 5 years.
Holding onto a company after getting a 10% yield becomes super easy. But the question one must ask himself regarding Gruh is, will the investor be able to wait 10 years to get a 10% Yield?
As someone told, all these talks of sell when it becomes overvalued, or sell on the first sign of slowdown look good only in theory. I am of the opinion that for high quality businesses with proven past track record and decent earning visibility, one shouldnāt sell on overvaluation. Also, in a market like this its very difficult to redeploy the sale proceeds.
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Stocks are never overpriced when everyone is labelling overpriced tag. It is overpriced when everyone sees value.
My expectation with this stock is only 15 % compounder if profits compound at 20%. If profits grow 22% , price expectation is 17 %. This is for next 20 years. Thatās why I donāt want to lose this compounder safe stock. Very difficult to find better opportunities now. In short term, nobody knows.
Gruh has devised the way to operate among non salaried poor people. So spread will always be there giving good ROE. This sector is highly risky, everyone is burning fingers here. See Manappuram, Motilal, Repco who ventured in this sector. They have NPAs. This is nitch area for Gruh and only Gruh can swim in this pool. This way it is sustainable wide moat. So the long term player. Nobody is recommending Gruh so it is safe. Buffet would say, āGruh is not earning on BV, it is earning on spread , quality of asset, on others money it takes cheap and lend on high rate.ā Whole India is lying vacant for Gruh to play. Market cap is nothing in comparison to opportunity. These type of businesses are not to be sold. This is my personal style of investing which suits me as I want to be lazy with big bet. The people who continuously find opportunities to make 30, 40, 50% gain and jump from this counter to that counter, Gruh is not for them. They are more smarter than me. So it is always individual call in this unique business.
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Way things are going in the economy, there is no sector or stock that looks like will grow at any decent pace. There is government led propaganda, but numbers do not show anything good. 2000 to 2010 growth was average 10%, now the papers are cheering 6.3%, that too some claim are fake numbers.
IT, Pharma, Realty, Power, Cement, Infra, Banksā¦ everything is beaten down fundamentally, just not on the bourses.
If one has proper research and a team in place to constantly monitor the stock, only then it makes sense to concentrate ones investment. Not on hearsay, media or hope and expectations.
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