Thanks Hiteshbhai for so clearly (as always) making me understand that DCF and PEG is not everything .
1 Can a portfolio have 70% well established companies like asian paints for example and 30 percent high grower or new companies and expect good returns or is it better to change the portfolio mix ? i tend to feel safe that major portion of the portfolio is into well established companies and hence not comfortable increasing allocations of small caps as my view is that they are yet to weather various economic cycles and have a high rate of uncertainty ? Am i making a mistake and sacrificing returns due to this kind of allocation as does this kind of allocation not help financial self sufficiency goals ?
2Also within the respective allocation, how much can one allocate maximum to a single large cap stock like asian paints for example and a single small cap stock like Mayur uniquoters ?
3 Is there any way to avoid panic selling when market falls as i tend to switch from small cap to large cap frequently on market fall ? Have read that you patiently invest in quality small caps for a long term, request you to please suggest on how to stay put with the portfolio ?
4 Also how to ascertain the management quality of small cap multibaggers given that very less information is available and can you please suggest few good quality small cap stocks and what process you use to screen out low quality multicaps ?
5 have heard that cash flow reveals what profit and loss account canât. Could you please guide as to what to see in cash flow statement that can reveal irregularities in income statement ?
sorry for asking repeated queries and heartily appreciate your patiently answering queries of amateurs like us in detail .
LT foods is not a great company. These kind of companies deliver returns when there is a lot going for them. That would mean there should be a sectoral tailwind, company specific performance and a strong bull market where there is a strong appetite for small and midcaps in the markets.
Or else the buy price has to be so low that all the factors stated above are priced into the buy price and there is very limited downside despite a lot of negative newsflow, poor results etc.
A PF of 70% well established cos and 30% high growers could provide decent returns over a sufficiently long period of time. Having large caps or small caps depends a lot on oneâs mindset. Small cap investing requires a special mindset. There one has to invest based on limited knowledge about the company, as all the information is not out there in the public domain. Plus the price swings are wild in small caps and one needs the stomach to digest these swings.
Regarding allocation we have a whole thread on Capital allocation framework which you can easily locate by looking at the landing page once you log into VP.
Investing in small caps as I said before requires a special mindset and its not for all investors. For holding on during severe corrections it requires a good amount of conviction as these days there is a lot of newsflow in most companies and one needs to be focussed on what to believe and what not to believe.
Management quality of small caps â first of all for the good companies the financial numbers usually speak for themselves. Even balance sheet gives a good idea. Consistent good dividend payouts is a good sign. High promoter holding is a good sign. Other thing which can be done is to go through previous annual reports and figure out whether the management has walked the talk. Plus attending AGM or meeting management otherwise if possible.
Regarding cash flow statements and how to read them, you can go through Pat Dorseyâs book on Five rules for successful investing. Maybe read it 3-4 times till you get the hang of it.
For most small cap invsetments I think some books are sacrosanct. One Up on Wall street on how to find good companies. Pat Dorseyâs book on how to analyse them. Ralph Wangerâs Zebra in a Lion country specifically focusses on small cap investing. Besides these also there would be many more resources in terms of books and blogs. You can read Ian Cassell on the subject.
Thanks so much hiteshbhai for taking the time out to reply in detail and really appreciate that after achieving investing success, you are giving back a lot to the investor community by handholding amateur investors like us . Will just place the order for Pat dorsey book . Had read about your recommendation on Peter lynch book and i am almost through the book, i found it extremely interesting and insightful , even better than warren buffett letters IMHO . (I found this one to be very practical till now whatever i have read and this along with poor charlies almanack has to be my favourite till now).
Very clear on the same now. had just 1 query
In most cases , i feel increasing promoter holding to be one of the main triggers for investments in small cap stocks . Can that be also said to be one of the great comforting factors and that very low chances of book fudging as else promoters wont increase the holding ? (Of course this is assuming that ROCE and growth is there ).
Thanks once again HIteshbhai.
Thank you for your valuable feedback Hithesh Bhai.
It makes sense to me that overall cost of acquisition would go down when buying stocks below 200 DMA. But from back testing for some companies like the ones you suggested, I found that the portfolio level returns have suffered.
There are three challenges:
Companies I buy are discovered names, so itâs a rare event for them to close below 200 DMA, leading to opportunity loss.
When I buy in weak momentum, my portfolio gets negative returns and itâs a challenge to get back the paper loss when same money would have given positive return on another portfolio holding.
Counter intuitively, I believe itâs better to buy on price and momentum strengths because great companies are mostly near 200 DMA an so I get more chances to deploy my monthly income stream. Thereby avoiding having to put some funds in liquid funds (6-7% returns) and reduce the overall returns of the portfolio.
I got this Idea of TechnoFunda from a presentation by @basumallick about combining buy and hold with simple Tech Analysis (200 DMA crossing) to get superior return. He even back tested the data in Trendlyne. Link to PDF
Hello Hiteshbhai,
I am following your post for sometime now. First of all thank you very much for educating small investors. I have large chunks of my portfolio in TCI Express and Transport corporation if India. Do you track these companies. It would be really helpful for me if you provide valuable comments.
I dont track tci xps. But used to track and own tci some time back. I was excited by the kind of verticals it was in and the kind of profitability generated by sea transport business. But there is an element of unpredictability to this business in terms of consistent profits and it seems they dont have much pricing power over their customers. Or maybe they pass on increased costs with a lag. But I was looking to get into cash and hence sold out at minimal profits. Havent tracked it since.
Muthoot finance is a steady business with main business coming from gold loans. Gold loan itself is a business which is stagnating and there are aggressive new players like iifl etc and some banks too which have entered this business though muthoot and manappuram still dominate the scene. But I cannot see these standalone gold loan companies showing the kind of growth shown by other nbfcs and hence I feel returns from these kind of companies can be muted. Instead try to look at companies growing at 20-25-30% cagr in financing space in some segments with good managements and which have been beaten down due to the general weak sentiments in the nbfc sector. I feel gold prices have very little to do with the business except to provide some cushion to npa concerns and higher amount of loans due to higher prices of gold. Instead if I want to play the gold bull run I would prefer gold etfs with low expense ratio and exit loads.
Regarding Rain Inds its scary to see the price fall from 475 to 110 levels within a matter of a year. It went up in a similar straight line kind of pattern. These stocks which go up and come down in a short span of time are what I call mountain pattern on charts. They resemble a mountain on way up and down. And with most of these mountain type of charts once the upmove and downmove is over the stocks dont do much. The whole game is over within that time. Optically these stocks might look cheap but one has to be mindful of a potential change in the cycle of underlying commodity. Rain also has very high debt of 7000 plus crores and if anything goes wrong, it can fold up. If at all a position is considered here its better to do a deep detailed study of the company, its underlying commodity/product and its cycle.
Hitesh Bhai,
Hats off for the masterly analysis of the financial sector and Gold Loan companies.
You are right that the gold loan sector is facing competitive and regulatory pressures,and fast growth may be elusive. That said, my take is that the sheer ease of doing business, for the illiterate farmer and the labourer,that these gold loan companies offer,with minimal red-tape,which is the bane of the banks, may stretch their runway quite a long way.
And yes,Rain Industries has taken itâs shareholders for a heart-stopping roller-coaster ride, but many will still like to jump on to the slowing band-wagon,heedless of the warning signas that it is a commodity,cyclical business,with the Chinese factor always the elephant in the room. The large debt of Rs 7,000 crores is a sobering reminder,as you well pointed out.This market that has had itâs fill of debt-laden and leveraged companies.
Finally, though I agree with you that the best of the halycon days of the NBFCSâ and the fancied darlings of the private sector banks,may not return anytime soon, we cannot close our eyes to the fact that India will remain a credit-starved economy for a long time to come. And with the Indian economy getting into double digit growth,in the coming decade,if things pan out(a big if), the scope for growth for the banks and credit-lending institutions,will keep in lock-step with the growth in the economy. So your analysis is valid,insightful, and puts a lot of complex factors into readily understandable language, but I think a long-term portfolio will do well to include such tried-and-tested banks because some of them are simply going to grow bigger,along with the economy. And they may be too big to fail,though that axiom tested the economy of USA, almost to a critical point in the sub-prime crisis of 2008 .
Your words of advice and wisdom will serve as warning lights to rushing headlong into the financial sector. So,I can add my little bitâProceed with Caution,Fragile,Handle with Care.
Regards,
Hitesh bhai, what are some good quality growth stocks that one can consider for investment after doing analysis ? Hows cholamandalam finance compared to bajaj finance ? Thanks so much
Hi @hitesh2710 What are your thoughts of Mayur Uniquote and Multibase India? Since auto sector is not doing well, do you see major impact on Mayur Uniquote too? My thoughts are that auto sector might not be down for long time since car is becoming a need and not a luxury. What are your thoughts on these two companies?
@hitesh2710 - I guess the stock pledging of Sterlite Technologies was discussed before. However, given the weak mid-caps and market completely ruthless on any indication on corporate issues, request your views. The stock is beaten down despite a stellar quarter. Do we need to see stock pledging as a red flag? Thanks.
I had tracked Sterlite Tech some time back and thought to share my views. Though Hitesh Sir may better clear the air with his more profound thoughts.
The Vedanta Group companies are always used to help each other businesses. Here in Sterlite , the reason behind pledge is to delist one of promoter group company from LSE. That should not be a big worry looking at the entire group. But i prefer companies with no pledge or only a short time pledge and that too not done repeatedly. There is also another factor.
My father comes from non finance background and had very less belief in stock markets. Somewhere around 2008 , there was lot of hype around R Power IPO. Everyone was talking about that only. He also got in and applied for that (which was his first and the last investment in markets). He was allotted 1 lot (27 shares) around Rs 450 i guess. Recently around a year back , i had found his Demat account details where those shares were lying. Had sold those at around Rs 40 after 10 years.
The learning was that if a lot of hype is created around a story , it is better to stay aside and keep watching from a distance till those things settle. Had burnt my fingers in MOIL in my initial journey a year back where a lot of talk was going on Manganese (that it will be used in Electric Vehicle and it is the future). The stock has corrected around 40% from there. That does not mean that the company is bad or the story is false but that surely means that the right time to buy is little far and a deep study is required before any purchase.
Till last year , every other guy was behind Graphite twins. Even lot of analysts claimed that it is not a cyclic change but a structural and graphite is the future (Transition towards EAF Route). Many bought the graphite stories and suffering now. My learning helped me to stay away this time.
Interestingly I found a company Orient Refractories which uses to make Refractory material used for making steel through EAF Route. No one was talking about it. The past record was excellent despite being in cyclical sector. I picked that up and that gave satisfactory 20% returns in last one year. Recently i heard many talking about Orient Refractory and had reduced some exposure.
Similar hype was created around Sterlite Tech when it was near 350+ that 5G will be there and it is the future. I looked at it and thought to give a miss. The past record and capital allocation in combined Sterlite Power and Tech was also not that good. Personally I prefer missing a multibagger than having sleepless Nights
I am not saying that business is good or bad. They have a good order book in hand. At around 350 , it was trading at 35X earnings and arguments behind the valuations were that it is factoring lot of future growth. Currently it is around 20X earnings which still is not cheap for a commodity business. ICICI Sec has come up with a report and target price of 350 few days back. It is better to analyse a report that why they want you to purchase the story. Making money is not that easy. I believe the stock to move down further till 170-180 levels (may or may not come) and that is my individual study and should not be taken as target as the forum is not for price related discussions.
Disc: My experience in markets is only of 1 year and that too without any finance background. So my thoughts may be immature and of no use. Had shared my limited understandings.
I remain invested in multibase but in the short to medium term there remain headwinds in terms of slowdown in auto sector. Same goes for mayur though I dont track it too closely.
Regarding how long the auto sector slowdown is going to persist its anybodyâs guess. The sector has had a great run till now but I think it could take a bit of rest for now. Difficult to predict when the cycle will turn. I think very few anticipated that the cycle will slow down so fast.
Sterlite Tech has kept posting very strong numbers. But in the kind of market we are in, pledging is currently considered to be a very risky parameter in any company esp after the fallout of Zee.
Plus the Anil Agarwal group has not got the best reputation in the markets after their dealings in Sesa Goa and Cairn etc. Using one companyâs cash for other companyâs expansions or acquisitions and so on.
Besides that, the stock earlier was quoting at valuations which were discounting 2-3 years of forwards earnings. So a correction was warranted and usually these kind of swings dont stop where they should stop at. So I guess it might swing in the direction of pessimism before it normalises.
Hiteshbhai, regarding Pledging, I have the following question:
I have been reading about Bajaj Consumer for the last few days. In my opinion, its financial performance (mergin, ROCE, dividend etc.) and also the act of the management so far indicates that they are conservative, transparent and shareholder friendly. But the only turn off is share pledging, which the promoter is doing to fund his other infra/sugar business. Bajaj Consumer is financially stable and needs no such money.
Now what happens if the promoterâs investment in the infra/sugar doesnât give returns or make losses? He will need to sell his stake to return the money and eventually promoters stake will decrease in Bajaj Consumer.
But how does that affect Bajaj Consumerâs financial performance? I agree that the stock price can nosedive if this happens, but I can find no reason how Bajaj Consumerâs turnover/profit/cashflow detoriate because of promoterâs stake decrease!
what if the promoters stake decreases such that they become minority shareholders? They can be a target of a hostile takeover. Even if it doesnât happen, the board and the owners may not be in sync with the decisions for e.g. should they do a capex, pay a dividend etc . Lets say the promoter is a very talented guy, but having lost his control, do you think it is easy to run the business? will he be as motivated as earlier?
Thanks @bharat19. I agree the conglomerate is now well known for is corporate governance. I think it commodity nature of the business is lesser talked drawback amidst the hype around 5G and IOT. Thanks for butting in with your views. Appreciated.
Hostile takeover is an issue Iâve considered but India have seen only a handful of these. But itâs a possibility. https://www.lawteacher.net/free-law-essays/business-law/india-has-experienced-only-a-handful-of-hostile-takeover-attempts-business-law-essay.php
Moreover, several well known companies have very low promoter holding. For example: Persistent (30%), Cyient (22%), Mindtree (13%), India Cements (28%), Satin Creditcare (27%), Astra Microwave (13%). So, I wonder if ease or motivation of running the company by the promoter is linked with his % holding. On a different perspective, in my opinion, if the promoter is a good guy, he will become more motivated to prove the investorâs perception about the company wrong.
