Hi @hitesh2710 bhai,
Can you please share your thoughts about this message.
On one hand the valuations seem to be high whereas the future looks to be good due to fall in crude prices, electricity price and low inflation due to the reasons of electric vehicles, battery tech, and advent of renewables. Consumption will increase.
Can you share your long term opinion.
Hi @hitesh2710 bhai,
What is your opinion for L T foods for long term investment?
Can I do the investment in companies on SIP basis? e.g. I have made a smallcase on zerodha for the companies I want in my portfolio. Every month on a particular date I will invest in my portfolio. Its in a way similar to what we do when investing in Mutual funds. Please guide me.
Hitesh bhai, whats the best way to understand cash flow ? I have tried but struggled . Studying profit and loss account is easier and can be compared to previous years . What should be the things that one should look out for in a cash flow statement and how to interpret the same ?
Regarding valuing companies like Asian Paints, pidilite and page inds, one needs to take into account the kind of longevity of growth these companies have. Some studies done my Motilal Wealth Creation studies indicate that if the company is a high quality, less prone to disruption and isnt exposed to too many variables and has a very long runway for growth, then over a pretty long period of time say 10 plus years, the price at which the stock is bought might not mean much and the investment will yield very good returns. I think the coffee can investing also stresses on the same points.
On how to buy these companies the ideal way is to go ahead in a SIP kind of method If one is buying for 10 plus years then I think the buying also has to be done on an extended timeframe.
Key remains in buying the right companies and not going by companies currently in vogue and hence market favorites. One has to see long term history of these companies of how they have fared over good and bad times and then take a call. Usually the companies that qualify in these lists would be dominant market leaders in their segments and the opportunity size in the sector is big and growing as the years go by. These need to have top class managements, great balance sheets and excellent financial ratios.
These companies will always fail the PEG test as these are well discovered companies and there is nothing unknown about them. Over a long time period even the minimal variables in these business tend to equalise. e.g in case of asian paints crude price is important and it tends to go up and down but over a longer time period these things tend to normalise.
The other option to buy is to buy them during market meltdowns when during the final phases of market corrections these too correct and one needs to have courage and conviction and money to buy these type of companies.
Currently the markets are skewed towards high quality mid caps and large caps in terms of preference. That is usually the case when the market levels are thought to be elevated in terms of valuations wrt nifty or any other major index.
During these times small caps or less fancied midcaps find no favour with the markets. There might be a case for studying some good small and midcap companies and trying to make a list of such companies to track and buy if valuations offer limited downside.
Coming to the global picture a lot of market gurus have expressed their concerns about the global picture and thats a worrying sign for markets. But corrections usually dont come about when everyone is expecting them.
I think part of the resilience shown by Indian markets is a lot of SIP money flowing in as well as a lot of disbelief on the part of a lot of investors who are sitting on the sidelines waiting for a major correction to deploy their funds.
I for one dont know how markets are likely to pan out but have approached markets with caution and have kept my allocation low and have some gunpowder ready in case of opportunities that might come about due to market meltdowns.
Coming to your query about a cautious way of investing I think the easiest way to follow is prepare a list of companies to be bought and buy in a staggered approach over a 12-15 month period.
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 can’t. 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 one’s 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 – 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 Dorsey’s 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 Dorsey’s book on how to analyse them. Ralph Wanger’s 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 it’s 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 it’s a challenge to get back the paper loss when same money would have given positive return on another portfolio holding.
Counter intuitively, I believe it’s 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
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.
What is your opinion for stock like Muthoot Finance which is available at 11PE & is it good stock to play
gold price surge. And also Rain Industries available at 3.5PE (having M.cap3800 cr) & going to deliver
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.
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 it’s 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 it’s fill of debt-laden and leveraged companies.
Finally, though I agree with you that the best of the halycon days of the NBFCS’ 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 bit–Proceed with Caution,Fragile,Handle with Care.
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.