We often find good stories going around that may not be excellent businesses for the purists, but nevertheless keep posting good to great results marked by quarter on quarter improvements.
The businesses may be on the verge of a turnaround, or about to reach significant scale and make its presence felt in its niche, so (historical) numbers do not accurately reflect the changing dynamics of the business, and the larger market continues to ignore these - oftendue to legacy issues/perceptions (company/sector) or just underexposure!
But 6-9 months down the line, the sheer weight of performance - standout quarterly numbers )- often get them their due!
These are typical candidates where the performance and visibility into the immediate prospects are great leading to absolute undervaluation. (No relative valuation with respect to market or peers, or even historical valuation). Sheer undervaluation that just leaps out at you!Candidates that fit our Short Term Portfolio allocation philosophy. Candidates that potentially can give you a 50% upside within 6 -9 months, or less than a year.
Constructing a Short Term Portfolio may be very instructive for you to develop a capital allocation philosophy for yourself. Those interested can follow that discussion track in the Capital Allocation Framework thread. Some of us had been debating introduction of the Short Term Portfolio forum at ValuePickr (didn’t want core readership to feel we started encouraging trading strategies:-)).
Meanwhile **Indag Rubber **just ran away today, on the back of stupendous Q2 results!!. So no further delay, if some business is STANDING OUT, we better start allocating more energies to It!
A Short Term Portfolio will also force us to benchmark ourselves against high performance standards!
So what are my top mispriced bets at the moment? Those that are part of my Short Term Portfolio, where I have started re-investing the CASH!
Oriental Carbon: Has been discussed quite a bit at the forum. The only producer of Insoluble Sulpher (a key RM for Radial Tyres) in India and among the few players worldwide. 11000 MT expansion doubling the capacity underway. 1st phase 5500 MT completed in August is reportedly sold out. Balance 5500 MT to be completed by year end. Available 3-4x trailing basis with Dividend Yield of 3.2% at CMP 122.
Atul Auto: Again discussed quite a bit at the forum. A 3-wheeler manufacturer getting its act together. Impressive growth track since the last 2 years. 1H has already locked in 50% growth over last year. Impressive reduction in debt, working capital requirements, strong cash flows make for a compelling stock story. Available 5x 1 year forward with Dividend Yield of 3.2% at CMP 99.
Another one which can make it to this list is National Peroxide. The plant was shut down in Q1 for 70 days for expansion. Hence, the results were poor and the stock tanked from 600+ levels to cmp of Rs. 440. The stock has been discussed on the Not so Hidden Gems forum.The commercial production from the expanded facilities has begun in Sept11 and hence, going forward the next 2 quarter results may surprise the market.
Manjushree Technopack on course to register a 40-50% growth for FY12 is another good Short Term Portfolio prospect, at dips.
Indag Rubber is another, should it correct with overall market in near future. I must devote some time and compile its stock story for bringing everyone on the same page.
Diamines & Chemicals Ltd is another stock idea worth investigating more. Div Yield adjusted for Bonus is still 5% plus. Need to understand the difference in the chemicals (from say Balaji Amines or Alkyl Amines products) why are OPMs at 28-30%? and sustainable? Meanwhile a 50% growth in 1QFY12 seems to have peaked and may not lead to overall 20% growth for the year?
Throwing up more names with inadequate homework even just to encourage more flow of possible contenders! Strong balance sheet with excellent growth visibility and undervaluation combinations.
Please throw up more names for discussion and further homework in these uncertain markets!
We could add, Ajanta Pharma here, don’t know why that has been not discussed widely, No’s look good and available at a good multiple. Also the price has been holding well, Its one of the best picks from Hitesh Bhai, A Dark Horse in the Pharma Sector and ofcourse a silent performer.
Short Term Portfolio contenders are essentially those where a big gap exists on the valuation front - for one reason or the other. Once the Valuation gap closes or performance/growth falters they may need to be exited, or a shift made to other counters which are more promising!
Contrasted with these, Long Term Portfolio contenders are those where the quality of the business is excellent and size of the Opportunity before the company is huge. Examples are Mayur Uniquoters, Astral Polytechnik, Suprajit Engineering, Balkrishna Industries. These are companies where our homework and conviction is very high and we should hold on for 3-5 years to get the most benefit!
Short Term Portfolio is a churning portfolio, consisting primarily of undiscovered stocks, where every 6-9 months or even sooner you are churning when 50% plus upsides are achieved or valuation gaps are closed in vis-a-vis growth, or other better opportunities come to our notice. This portfolio and the philosophy if executed well, also helps me retain 20% CASH always, from the Capital Allocation perspective!
@Manish - Ajanta Pharma is now a discovered stock, and I don’t believe that kind of valuation gap exists any more, despite the corrections (relatively speaking). Having said that it is more like a Long Term portfolio stock capable of compounding at 25% CAGR. Hitesh certainly has it in his Long Term Portfolio! And I have been flirting with it! Ask more pointed questions at the Ajanta Pharma discussion thread and Hitesh will be glad to answer them I am sure.
Excellent topic to participate in.The stock which i think will rerate is WIMPLAST.
Wimplast manufactures and sells plasticextrusionarticles namely moulded furniture and Bubble guard sheets.It’s having debt free balance sheet and posted 168 cr sales and 18 cr NP.Eps is 30 and announced rs 4.5 dividend.So it’s trading at 6* PE.
So what is the interesting point in this story that will rerate this stock? Lot of people are thinking that it’s ordinary company and any one can manufacture and sell plastic furniture.So no moat and highcompetitionetc.Interesting point here is it started manufacturing CELLO BUBBLE GUARD SHEETS having applications in housing,retail,industrial ,advertising,packaging segments.Note this technology and machines are imported from ITALY and it’s pioneer in ASIA.(The promoters of Cello pens also imported the technology from Italy)The company is participating in exhibitions and are launching aggressively.
The company is ramping up thecapacitiesat new sites and its announced recently to expand Fluted bubble guard sheet production at Daman.I have full faith on capabilities and integrity of management that makes Cello pens unbeatable.Here my bet is on Management and Cello bubble guard sheet technology and it’s applications.
Interesting, but what makes us think the Growth on sales and earnings front will not stagnate. From first look and going by Q1, Profitability growth may be in single digits for FY12.
Why should we consider this versus others with similar strong balance sheets, available cheaper and having much better immediate growth visibility?
Please elaborate more as you would have done more homework on the stock.
Good initiative donald especially in context to the current market scenario.
One stock that I feel should meet these criteria is Shanthi Gears. Excellent management, great balance sheet, successful turnaround (if one goes by the past 2 quarters as compared to the earlier quarters), a new well qualified CEO at the helm are some of the endearing attributes here.
Going by conservative estimates, Shanthi Gears is likely to report an EPS of around 4.2 to 4.5 per share for fy 12. For an engineering company with practically no debts and valuable land assets which it can monetize, the cmp of around 39 looks very attractive for someone looking at 6-9 months with expected returns of around 30-40% and a price target of close to 50-55.
There is an excellent HDFC securities report for those wishing to know more about the company dated july 11.
Thanks. National Peroxide looks pretty interesting as I leafed back through the earlier posts. The fundamentals are strong - debt free, high returns and margins, ability to fund expansions from internal accruals, and starting on enhanced capacity of 25%.
On a trailing 12m basis it is quoting at 5x with a dividend yield of 2.75 at CMP 437.
Perhaps you can throw some light on FY12 expected Sales & Earnings. Is it fair to say company will be able to get the 25% expansion benefit in Q3 & Q4, and Q2 would be flat vis-a-vis FY11.
Effectively the company will end up with a 10-15% growth in earnings? What are your views on this aspect?
Could you throw some more light on the growth projections. To achieve 4.5 EPS company will need to do some 35-37 Cr in PAT. Do you expect an acceleration in the coming quarters?
Despite such high margins, return ratios are pretty depressed. This just points to low Asset Turnover,or large unutilised reserves, etc. And are likely to remain depressed (<15%)in the coming 2 years?
need to think if with a 12% RoE in FY11, should this company deserve higher than 12x valuations?
I think one can have a look at Cravatex and Wockhardt … Wockhardt has turned around very well churning NP quarter after quarter and now the debt problems seems to be practically over now. With reduced debt burden, ever growing business and almost certain re-rating, i believe this one shall go very far.
Cravatex, will be doing great with opening of new FILA stores. Apart from that its gym equipment business would also grow very fast. Since its got a strategic tie up with the Talwalkars, and with Talwalkars opening around 30-35 gyms in next 6 months, Cravatex will surely get a good earnings booster.
For very very very high risk takers one could also look at a super micro cap - Kilpest …
I have a taken a short term bet on Globus spirits (Thanks to discussion in the section not so hidden gems).
The enhanced capacity is already in place and Q1 results were good. Also, the merger with associated distilleries is approved and hence the earnings will be even better.
I recall reading a HDFC securities report on this with targets of 180 in 6 to 9 months.
The company is likely to do sales of close to 210 crores and at net margins of around 17.5 to 18% due to higher contribution of higher margin custom made gears, it can do the targetted 35-37 cr net profit figure.
(<15%)in the coming 2 years?
Reason for depressed return ratios is not fully utilising its assets and cash on hand. The company has one spare land parcel and another land parcel which is being used for CSR things. Plus cash is not generating much by way of returns.
need to think if with a 12% RoE in FY11, should this company deserve higher than 12x valuations?
Here we are considering a turnaround company which is likely to be on the growth path in next 2-3 years. The correct method of evaluation for companies like Shanthi gears should be EV/EBIDTA where Shanthi scores over competitors like Elecon etc.
Two possible triggers could be the entire sell out of the company to some worthy suitor and another possibility of tie up with some global gear major for establishing a manufacturing base for the MNC in India.
The company is likely to commence the manufacture of mining equipment in the next 6-9 months and this remains the key monitorable.
Remember we are talking Short Term Portfolio contenders - an upside of 50% in 6-9 months! And that too in current market uncertainities! To be able to appreciate that much in current climate a discovered stock (much of the prospects are built in to the pricing) will have to pull something BIG out of its hat! More likely candidates probably can be the relatively undiscovered stocks that surprise BIG on the performance!
So the starting point has to be a BIG Valuation gap that leaps out at you! Emphasis is on absolute valuation - not relative to peers, market or historicals.
Wockhardt is quoting 23x TTM basis as does a Cipla or a Dr Reddy’s and close to a Lupins 28x!Crevatex too is quoting 18x TTM basis. Unlikely to surprise!
The profitability may be stagnate for one or two qr.I am expecting 25 per CAGr for next 2-3 years.Please look at the announcements by company regExpansionplans with internal accruals.I already stated that here my bet is on consumer products the company is launching.They haveenormouspotential.If we check OPM’s and NPM’s they are highest in the industry.Last year they posted 25 per growth in sales and 21 per growth in EBITA.My eps projections for FY12,FY13 are 37 and 45 respectively.
This company is the leading manufacturer of aluminum foils.
The company has seen consistent growth over the past few years. It is expecting a 15% growth in revenues for FY12 due to increase in retail selling. A new capex is in progress and is estimated to be complete by March FY12. With this expansion revenue growth must be atleast 25%. Currently the stock is trading at 240 levels (eps of 52 for FY11). Company has sufficient but manageable debts. I am expecting to see a reasonable appreciation in the stock value after the Q1FY12.
Hanung toys
These guys are the leading manufacturers of stuffed toys and are also in the textile business. 74% of the revenues comes from exports. Consistent growth in the last few years. They have huge debt burden and that is more than compensated in the stock value. Not often do you get to buy a company with an eps of 48 at 100 rs. Management isn’t great either, but i have a feel that this company is misprcied at the moment.
Another valuation mismatch story i think is KAVERI SEEDS.Why i am going to refer the stock that is trading at 15Fy11 and at est 10fy 12 earnings? If we look at finacials sales and net profits are growing at 45 per cagr last 5-6 years.A company growing at such high rates that too having debtfree balance sheet should trade at high valuations.If we look keenly in to balance sheet the company got 110cr as advances from customers.This alone tells the peoducts demand and acceptability from customers. Another imp aspect that will drive the company a step higher is prestigeous 120cr Oleioculture project with world renowed company Netafim based Israel on turnkey basis.The company targets some high potential countries to export its products.The first phase is ready to launch this quarter. Considering all these aspects i assume it will rerate and trade at high valuations
With the frenetic pace of activity in this forum, it seems we all are losing our discipline in being long term investors. As Donald has rightly pointed out, we are looking for huge valuation gap in the short term which should close down within 6-9 months. I believe only those stocks where we have a conviction rating of 10/10 for the next 6-9 months should be discussed here.
Management isn’t great either, but i have a feel that this company is misprcied at the moment.