Yogesh's blue chip 10 Portfolio


(Yogesh Sane) #203

Datasources I use do not generate charts but they give you an overview screen for each company including major data points. This screen can be exported to (or copied and pasted into) Excel to draw charts.


(Whipsaw) #204

Hi Yogesh

Any recent changes/additions to your SME portfolio?

Thanks


(Yogesh Sane) #205

Sold RM Drip after results as receivables have gone up a lot and no operating leverage is seen. Otherwise, 50% revenue growth is good but not all revenue is flowing to the bottom line. Also price jumped after results so took advantage of that.

Purchased Beta Drugs at 100 only to see price quickly jump to 200 and fall back. This is into manufacturing of oncology products which is a niche and highly specialized area in pharma manufacturing. Company has another group company that does the marketing so still trying to figure out if this arrangement is risky considering that margins in pharma is mainly from marketing activity. FY 18 results are good.

Purchased Valiant Organics. This Aarti group company is into manufacturing of chloro-phenol. Company has excellent fundamentals but is merging two large group companies with itself so there are large structural changes happening in its fundamentals. Group companies that it is merging with itself have similar fundamentals but still waiting for clear picture to emerge before committing more as valuation is high.

Added RKEC after H1 results. This issue is also very volatile. Waiting for results to get an idea about order book and inflows in H2.

No changes in Worth Peripherals and Shanti Overseas. Waiting for results.

Overall my allocation to SME is small as I am still testing waters. SME index jumped 50% from Sept to Dec 2017 only to give back most of the gains earlier this year. This volatility is largely due to low float, large lot size, small market cap and half-yearly result publishing. Lot of price action is concentrated around result dates. This volatility adds to the risk without any additional return. It also means that market price is likely to be significantly higher or lower than fair value so one needs to be careful with timing and valuation.


(Whipsaw) #206

Thanks. I thought you had Ice Make Refrigeration also. Did you apply for its IPO?


(Manohar T. Patil) #207

@Yogesh_s, Thanks for the insight on SME stocks. Did you by any chance evaluate CMI Infraprojects & Dynamic cables?


(Yogesh Sane) #208

I applied for the IPO but did not get any allotment. Since listing, it is trading at a steep premium to offer price so there is no margin of safety at current price hence did not buy any from the secondary market.

No idea about CMI Infraprojects. Can you please point me to their prospectus?

Dynamic cables is a manufacturer of electrical cables and their customers are cash strapped state electricity boards who are having troubles paying their dues to the company. Company has large receivables and receivables past 6 months due is almost 50% their net-worth (pre-ipo). Company even filed lawsuits against their customers for recovery of dues so there is uncertainty about ability of the company to recover these dues. They should have made some provision against unrecoverable receivables but I could not find any. They also have a high customer concentration and low margins, which means even if one customer defaults, entire year’s worth of profits will written off.

Normally I don’t invest in companies with huge receivables and when company is raising IPO money with the sole objective of enhancing working capital or general corporate purposes. there is good chance that such companies treat shareholder money as free money.


(Manohar T. Patil) #209

@Yogesh_s Thanks for sharing your thoughts on Dynamic cables"

Sorry, I miss-spelled the name for the company. It is CMM infraproject (not CMI). Below is the url for Prospectus.
http://www.cmminfra.com/wp-content/uploads/2017/09/Prospectus-CMM.pdf


(Amit Aggarwal) #210

How do you see H1 results? Can’t find on NSEEMERGE site and it seems company website is down.


(kvbsagar) #211

Hi Yogesh Sir,
Can you please provide suggestion on HEG and Philips Carbon to buy at current price for long term.

Thanks
Vijay


(Vivek Gautam) #212

nothing to worry .site being upgraded.


(Yogesh Sane) #213

CMM infra has reported good growth over the last few years and order book is also good. For the kind of construction activity it does, the opportunity size is also large. However, its ebitda margin at 5% is lower than industry average of 10-12% and for these kind of activities I would expect EBITDA margin to be in the range of 14-15%. Margins may improve with scale but I won’t expect the margins to touch double digits.

I also noticed that company has poor cashflow and it has to borrow money to even pay operating expenses. This has limited its ability to invest in machinery which may be why margins are low. ROA and ROE is also low.

Low profitability may be because there are many unproductive assets on the balance sheet in the form of short and long term loans and advances. While short term advances are deposits with various government departments (which is common in a construction company), there are no details available about the long term loans and advances and there is a steady rise these loans and advances over the years. Together these advances are almost equal to its net worth.

Even in H1 results, there is sharp increase in loans and advances. Considering that assets are created out of reinvested profits, any uncertainty about assets on the balance sheets automatically creates uncertainty about reported profits. I would stay away until margins improve and more details are available about loans and advances in the annual report.


(Yogesh Sane) #214

RKEC’s NSE filing are available here

https://www.nseindia.com/sme/marketinfo/corporates/announcements/announcementsList.jsp?symbol=RKEC

NSE Emerge site is available here

https://www.nseindia.com/emerge/index_sme.htm


(Yogesh Sane) #215

On this forum we do not ask or provide stock recommendations as buy/sell decisions are up to each individual investor. We can only exchange ideas.
Two companies you mentioned are cyclicals and estimating demand, supply and timing is important in investing these kind of companies. I do not invest in cyclicals so cannot help you with these ones.


(Dinesh Sairam) #217

Really curious about this philosophy of yours. Stocks rarely stay undervalued. Doesn’t this cause too much churn and so, transaction costs, not to mention Opportunity cost?

I remember Philip Fisher writing something about this:

Read the last line, more importantly. I’d love to hear your thoughts on this.


(Multiplier777) #218

Well said, Dinesh. Fisher’s argument of holding on to your great stock forever (if it is likely to continue growing) is easier said than done. Getting valuation argument in the middle to sell out (thinking it has got overpriced for its growth potential) will hurt one badly. But those who can practice it will reap the benefits.

I have been holding Page Industries for about 8 years now. Got frustrated about a year back when it had hardly moved for a long time. I sold some around Rs 14,000 out of pure frustration and thinking it had become overpriced for its growth potential. And lo and behold, it went up to Rs 24,000 in the next few months.

Lesson for me: Just hold on to your blue chips. As long as growth is assured and it a well run company with ethical management, just HOLD ON. You may not buy more but hold on to your investment.

Gruh is another stock I have been holding for around 7-8 years. This one I have not sold and am quite satisfied by the results. Growth is assured, management is ethical, sector tailwind is there and it is a well managed business. One can keep arguing that it is overpriced and a sell. Fisher’s above note quoted by you should be a guide to just HOLD ON TO YOUR BLUE CHIPS. Let the market keep debating about valuations.

The last line of Fisher’s article clearly needs to be read again and again before selling your blue chips.

“If the job has been correctly done when a stock is purchased, the time to sell it is — almost never.”


(Hitesh Patel) #219

I think this debate about holding a stock forever or for the very long term has to be seen in context of the investment style one practices and kind of returns one expects.

Yogesh practices his own style where he re balances his portfolio every year based on certain fixed parameters. In this kind of style there will be no place for holding a stock for ever because at some point of time the parameters he has fixed will trigger a sell.

And once he has fixed up a system which he has back tested and which has worked for him over the years I think it would be unwise to change the strategy just for the sake of hoping for a multibagger.

And most large caps are very well researched stocks where most of the things are known to most of the people. Its how one interprets this data is important and which provides one the edge.

For other styles of investing this holding on for long time will definitely work but these theories have to be followed in context of one’s investing style.


(Yogesh Sane) #220

Buy and hold forever is not for me simply because I don’t have the skill to find businesses that will produce good results for a number of years let alone forever. There are a number of businesses that I bought in the past that eventually lost more than 90% of their value. Fortunately I got out of these businesses much before that. With due respect to Mr Fisher, If I had followed his advice I would haven been bankrupt now.

How do we know if the job is correctly done? We can only know that in hindsight. What if after 10 years we realized that the job was not done correctly? And after realizing that if you change the way you do the job, do you wait another 10 years to see if you got it right this time? I think a more practical way is try out different strategies and make small improvements regularly. Over a period of time you will know what works for you.

It takes a great deal of skill to find businesses that will do well in the long term i.e. to do the job correctly. Unless you are extra-ordinarily talented, most investors reach that level of skill only after being beaten up by Mr. Market for several years, even decades. By the time an investor reaches this skill level (if at all), his investing career is almost over unless he is extra-ordinarily talented and started investing as a teenager. I certainly don’t fit in either of those categories.

Ideally, I would like to own businesses that produce a steady growth in earnings and stock price also goes up steadily and remains fairly valued. I will own that business for as long this situation continues. In fact, I did manage to buy few such businesses but I can only say that with the benefit of hindsight. Reality is that all good things come to and end and sometimes unexpectedly. In the long run we are all dead including good businesses.

Holding on to a business forever means we assume that there will be no good businesses in future. In fact half of my actual portfolio now consists companies that went public in last 2 years. Owner of a business does not have the option of switching from one business to another easily. As minority investors, we have the option of hitching our wagon to growth engine of a business and get off before it slows down and hitch it to another one that is picking up speed. Why not use that option?

I think you have answered your question. If stocks rarely stay undervalued, why hold them forever? An overvalued stock may be a good business but not a good investment. In fact there is an opportunity cost of holding on to overvalued businesses because you will not be able to invest in other businesses that are undervalued.

About churn and transaction costs, it depends on how often you review your portfolio and make a serious buy/hold/sell decision. For my low maintenance portfolio it is annual so there is not much churn. For my actual portfolio it is quarterly and sometimes more often based on how Mr. Market is behaving. Eventually, I will be moving on to my low maintenance portfolio so churn will go down in future.

My valuation model takes into account changes in risk premium so in a rising market risk premium drops and fair value rises although not by the same amount. Similarly, I consider (CAPM) alpha returns while deciding if a stock has produced abnormal returns and has become overvalued. Additionally, I have a tolerance band around the fair value so some overvaluation is tolerated especially if company is exhibiting earnings momentum. In the end I ask myself a simple question, if a stock drop 20% for ANY reason, am I willing and able to buy more? If the answer is no then I sell it.


(Yogesh Sane) #222

I have made the same mistake in the past and likely to make the same mistake in the future if I keep holding on to overvalued stocks. This is precisely the reason I don’t hold on to overvalued stocks. Even good businesses will go sideways or down for a while and investor begin to question their conviction, some bad news will hit the stock and that will act as the last straw that will cause the investor to bail out at the worst moment. Now calculate your CAGR from the last time you decided to hold it until you bail out this way and add to that the opportunity cost of not buying some other stock that would have gone up during this time. I am sure, it ain’t worth holding on to overvalued stocks. Moreover, for every Page like stock that jumped right back up, there will be 10 that won’t. I am not even counting this probability in my calculations.

I know there are lots of if and buts and estimates in this whole logic but devil is in the details and precise math. Additionally what’s also important is the loss of confidence when I bail out this way. I can’t put a price tag on that. It will prevent me from making big bets on my high conviction ideas. IMO, making big bets means one has to have a high success rates in one’s decision making process and mistakes and loss of confidence will prevent one from reaching that level.

Most of the stocks like Page and Gruh have produced wonderful record of earnings but at least half of their returns are because of expansion in their price multiples which have reached a level where further expansion seems unlikely. Although I felt the same way three years ago and their multiples have expanded since then.

My experience is that for every overvalued stock that I have sold only to see it hit new highs, there are 3 that produced mediocre returns in future and some even turned out to be disasters. My preference of avoiding such outcomes far overshadows regret of selling a great business early. Moreover, if a business is worth holding forever, one can always get back in anytime, right? How many actually do that? Many investors are anchored to their historical buy price and that prevent them selling and buying it back as it will reset the price anchor to a higher level. For me the buy price is always the market price when I last reviewed my portfolio and decided to hold.

I also believe that all great businesses will turn into average businesses sooner or later and market will value then as average businesses when that happens. To me, it’s a question of when and not if. Many will disagree with this assumption though. There are businesses that have remained great businesses for decades but these are exceptions and we can only say this with the benefit of hindsight. I certainly won’t be able to tell which businesses that are great today will remain so in future. In my valuation model, if you project future cashflows with this assumption and discount it at your opportunity cost, all such businesses will appear highly overvalued. Its only when you assume that a business will remain great forever, you can justify current price and that too when using a lower discount rate. Since expected return on a fairly valued stock is the discount rate used in valuation, expected return on such stocks is far lower than what I have actually earned and expected to earn (i.e. my opportunity cost) on other fairly valued businesses.

Holding on to overvalued stocks is essentially betting on a greater fool who will pay an even higher multiple in future. Such logic doesn’t appeal to me and I certainly won’t make big bets on it. I also believe that if you look hard enough, you will find good and undervalued businesses in any market. If there is a good business available at reasonable valuation, why hold on to an overvalued one?


(phreak) #223

Something I read in Thinking fast, and slow about buying extended warranties comes to mind. Some will spend anywhere from 5-15% of the cost of product for an extended warranty on a product whose rate of failure might be much lower than 5% in the extended-warranty period. It gives a peace of mind to the individual buyer in terms of individual decisions pertaining to the specific product, but for all the products you ever purchase in a lifetime, you might be better off adopting to not buying extended warranty as a “policy” and stick to it.

Similarly, a decision like holding onto overvalued quality stocks should be seen from a portfolio perspective or rather, from a portfolio of an individual, run by the same individual’s perspective. This special case can allow for certain policies to be adhered to without external influence (all the portfolio money is yours, all the buying and selling decisions are yours and yours only), similar to not buying extended warranties example.

When done as a policy, not holding onto overvalued stocks means the individual perceives better opportunities and even if a specific overvalued stock runs up, in the long run, the strategy will yield better results. This is a classic case of verifying if inference from the general applies to the specific and also to not be affected by narrow-framing (specific stock running up) but see things with broad-framing (portfolio performance over time).

The caveat of course is the individual’s stock picking skills and the capacity for idea generation, the quality of such ideas which depends on time, effort, knowledge and intellect. The bigger caveat of course is that most of us think that the general doesn’t apply the specific that is us. So the best way to go about it is to try it out for oneself and if in a broad framing context, the individual decisions don’t affect negatively, then stick to that strategy (until it works that is).


(pradip) #224

Thanks for sharing the ideas Yogesh. It is definitely helpful for novice investors like me. Would love to hear your thoughts on the below observations -

  • Valiant - Promoter has diluted equity and holding has reduced from 52% to 47% in last 1 Yr. Receiavles/Sales vary in 20-30% range.

  • NGL Fine chemicals - (Inventories+Receivables)/Sales =45%. Isn’t that too high? Why is the company not clearing inventories along with setting up new capacity?

  • NOCIL - 13% of promoters shares are pledged.(Inventories+Receivables)/Sales =40%. Isn’t that too high?