100 baggers by Cristopher mayer

Book "100 BAGGERS "By CRISTOPHER MAYER
(Book based on Retrospective study)

-Summary by Dr Pragnesh shah
(MD gynec ,laparoscopic surgeon)
Motera ,Ahmedabad

ESSENTIAL PRINCIPLES FOR 100 BAGGERS

1…CONSISTENT HIGH ROE/ROCE

=The most important principle

=. It’s so important it’s worth repeating again: you need a business with a high return on capital with the ability to reinvest and earn that high return on capital for years and years.

=Everything else is ancillary to this principle.

==Consider a business with $100 invested in it. Say it earns a 20 percent return on its capital in one year. A 20 percent return implies $20 in earnings. But the key to a really great idea would be a business that could then take that $20 and reinvest it alongside the original $100 and earn a 20 percent return again and again and again.

=Charlie Munger, vice chairman of Berkshire Hathaway said, Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6% return—even if you originally buy it at a huge discount.

Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you’ll end up with a fine result.

=It’s not the ROE only factor because high-ROE companies can still be lousy investments .

2…REINVESTMENT+CONSISTENT HIGH ROE/,ROCE

=I would instead emphasize looking for high returns on capital and the ability to reinvest and produce high returns for years and years

=However, we should prefer a company that can reinvest all of its earnings at a high clip. If it pays a dividend, that’s less capital
that it has to reinvest. And that reduces the rate of return

=Consistent ROE shows management’s skill to reinvest as explained below

Say we have a business with $100 million in equity, and we make a $20
million profit. That’s a 20 percent ROE. There is no dividend. If we took that $20 million at the end of the year and just put it in the bank, we’d earn, say, 2 percent interest on that money. But the rest of the business would
continue to earn a 20 percent ROE.
“That 20 percent ROE will actually come down to about 17 percent in
the first year and then 15 percent as the cash earning a 2 percent return
blends in with the business earning a 20 percent return,”

=“So when you see a company that has an ROE of 20 percent year after year, somebody is taking the profit at the end of the year and recycling back in the business so that ROE can stay right where it is.”

=A lot of people don’t appreciate how important the ability to reinvest
those profits and earn a high ROE is.

=Jason told me when he talks to
management, this is the main thing he wants to talk about: How are you
investing the cash the business generates

=The ROE doesn’t have to be a straight line. Jason used the example
of Schlumberger, an oil-and-gas-services firm. He’ll use what he calls “through-the-cycle ROE.” If in an off year ROE is 10 percent, and in a good
year it’s 30 percent, then that counts as a 20 percent average.
“I’m comfortable buying that kind of stock,” Jason said,

3…DONT FOCUS FOR SMALL GAINS
ONLY FOCUS FOR 100 BAGGERS

=. You have to Look for multibaggers only (Dont focus momentum stocks for small gain)

=So, rule number one for finding 100-baggers is that you have to look for them—and that means you don’t bother playing the game for eighths and quarters, as the saying goes.

=Don’t waste limited mental bandwidth on stocks that might pay a good yield or that might rise 30 percent or 50 percent.

=You only have so much time and so many resources to devote to stock research. Focus your efforts on the big game: The elephants.The100-baggers.

4…GROWTH, GROWTH AND MORE GROWTH

=Sales>10%…pat>20%…

=TOPLINE>10%

=If you have a company with
tons of cash flow but top-line [sales] growth is 5% or less, the stock doesn’t go anywhere,” he said.

= Jason is reluctant to buy a high-ROE company where the top line isn’t
at least 10 percent. But when he finds a good one, he bets big.

= If a company generates a lot of extra sales by cutting its prices and driving down its return on equity, that may not be the kind of growth you’re looking for

5…SHORT TERM EARNING FLUCTUATIONS V/S LONG TERM EARNING POWER

=Know business and differentiate short term earning fluctuation from earning power.

=You may miss 100 baggers if u dislike short term fluctuation with intact fundaments

=Don’t get lost following earnings per share on a quarterly basis. Even
one year may not be long enough to judge. It is more important to think
about earnings power. A company can report a fall in earnings, but its
longer-term earnings power could be unaffected

=EARNING POWER reflects the ability of the stock to earn above-average rates of return on capital at above-average growth rates. It’s essentially a longer-term assessment of competitive strengths.

=Failure to distinguish between short term earnings fluctuations
and basic changes in earnings power accounts for much over trading, [and]
many lost opportunities to make 100 for one in the stock market.”

=So, how do you separate the ephemeral(short term) earnings setback from the real thing? Well, there is no substitute for knowing the business you’ve invested in. If you don’t understand what you own, it’s impossible to make a wise choice

=That fundament hasn’t changed. All that’s changed is a temporary dip in earnings because of a cyclical change in fortunes in its customer base. There is no new competitive threat. There was no management change. There is no new regulation or other factor that might change this business in any significant way.

=This is the kind of thinking I do. As you can tell, you can only do this if
you know the business well. Spend less time reading economic forecasters and stock market prognosticators, and spend more time on understanding what you own. If you’re not willing to do it, then you’re not going to net a 100-bagger or anything close to it.

6…LOWER MULTIPLE PREFERRED

=You shouldn’t go dumpster(rubbish container) diving if you want
to turn up 100-baggers.

=Great stocks have a ready fan club, and many will spend most of their time near their 52-week highs, as you’d expect.

= It is rare to get a truly great business at dirt-cheap prices.

= If you spend your time trolling stocks with price–earnings ratios of five or trading at deep discounts to book value or the like, you’re hunting in the wrong fields—at least as far as 100-baggers go.

=I say lower multiples “preferred” because you can’t draw hard rules
about any of this stuff. There are times when even 50 times earnings is a bargain. You have to balance the price you pay against other factors.

=One way to look at it is by using something called the PEG ratio,”
Goodman suggests. “The PEG ratio is simply the (P/E Ratio)/(Annual
EPS Growth Rate). If earnings grow 20%, for example, then a P/E of 20 is
justified. Anything too far above 1x could be too expensive.”

=Dont overpay for growth

=It might seem with 100-baggers that you don’t have to worry about the price you pay. But a simple mental experiment shows this isn’t quite right.

=Truly big return comes when
you have both earnings growth and a rising multiple. Ideally, you’d have
both working for you.I call these two factors—growth in earnings and a higher multiple on those earnings—the “twin engines” of 100-baggers

7…MOATS

=In the overwhelming number of cases, a company needs to do something well for a very long time if it is to become a 100-bagger.

=So, what signs can we look for in a business that it has what it takes
to run for 20 years?
This gets us to the topic of moats

=A moat is what protects a business from its competitors.

= company with a moat
can sustain high returns for longer than one without.

A…You have a strong brand

B…Technology moat

C…low cost production

D…You enjoy network effects.

E…It costs a lot to switch

F…Entry barrier

G…Biggest company in small market

=Look for financial statements. Specifically, the higher the gross margin relative to the competitiors, the better.

=Moat, even a narrow moat, is a necessity for 100 baggers

8…SMALLER COMPANIES PREFERRED(<7000 cr)

=The median sales of 100 baggers companies @ $170 million(1200cr)

=On the other hand, you shouldn’t assume you need to dive into microcaps and buy 25-cent stocks.
It is not like you have to search microcaps for 100 baggers

=As a general rule, I suggest focusing on companies with market caps
of less than $1 billion
(<7000cr mcap).

=Not a necessity (remember, smaller companies “preferred”), but staying below such a deck will make for a more fruitful search than staying above it.

=Small companies can grow to 10 times or 20 times and still be small. They can even become 100-baggers

9…MANAGEMENT

=“In the ultimate analysis, it is the management alone which is the 100x
alchemist,” they concluded. “And it is to those who have mastered the art
of evaluating the alchemist that the stock market rewards with gold.”

= Investing with top entrepreneurs and owner-operators
gives you a big edge. And when you mix that talent with the other elements, you are on your way to big returns, if not 100-baggerdom

10…OWNER OPERATORS PREFERRED

=You invest your money in the same securities the people who control the business own. What’s good for them is good for you. And vice versa

=I say the best thing to do is invest with management teams that own a lot of stock.

=People with their own wealth
at risk make better decisions as a group than those who are hired guns. The end result is that shareholders do better with these owner-operated firms

11…GO BEYOND NUMBERS

=Early on, I relied on reported numbers and I screened for statistical cheapness. I’d look for low P/E stocks, for example.Everyone can see these numbers. Yet, these methods can still work well.

=Over time, however, I’ve learned that knowing what the numbers
don’t show is worth more than any statistic.

=. I want to find that something else is going on in the business that makes it attractive.

=I talk to a lot of people in the course of a year—investors, executives,
analysts and economists.

= Ideas can come from anywhere. But my best ideas often come from people.

=Hidden stories exist. And there is a person, somewhere, who knows that story.

=Make an effort to find those people and their stories

12…BUY BORING STOCKS

=Usually the market pays
what you might call an entertainment tax, a premium, for stocks with an
exciting story. So boring stocks sell at a discount. Buy enough of them

13…AVOID HOT SECTORS

=Avoid the hot sectors of whatever market you’re in.

= . That’s where promoters and shysters go because
that’s where they can get the biggest bang for the buck. The sector is rife
with fraud.

14…DO ENOUGH RESEARCH

…When someone tells me they can’t find anything worth
buying in this market, they are just not looking hard enough. With 10,000 securities today, even one-half of 1 percent is 50 names. Kind of makes
you think, doesn’t it?

15…SIMPLEST IS BEST

The best ideas are often the simplest.

=The price of a stock varies inversely with the thickness of its research file. The fattest files are found in stocks that are the most troublesome and will decline the furthest. The thinnest files are reserved for those that appreciate the most

=Peter Lynch comes to mind: “Never invest in any idea you can’t illustrate with a crayon

16…DIVIDENDS

= When a company pays a dividend, it has that much less capital to reinvest. Instead, you
have it in your pocket—after paying taxes. Ideally, you want to find a
company that can reinvest those dollars at a high rate of ROE . You wind up with
a bigger pile at the end of the day and pay less in taxes

=If the company had paid dividends, the story would be quite different.
Say it paid out one-third of its earnings. It would then take 15 years to quadruple its capital, not 10. And in 33 years, it would be up 23-fold,
instead of being a 100-bagger.

=Obviously,” Phelps concludes, “dividends are an expensive luxury for
an investor seeking maximum growth. If you must have income, don’t expect your financial doctor to match the capital gains that might have been
obtainable without dividends. When you buy a cow to milk, don’t plan to
race her against your neighbor’s horse.”

17…BUYBACK

=When you find a company that drives its shares outstanding lower over time and seems to have a knack for buying at good prices, you should take a deeper look. You may have found a candidate for a 100-bagger

=In a slow- to no-growth
economy, this tactic is becoming a more important driver of earnings-per share growth.

=Buyback criteria
A…Company should have available funds—cash plus sensible borrowing capacity—beyond the near-term needs of the business and
B…second, finds its stock selling
in the market below its intrinsic value, conservatively calculated.

18…DIVERSIFICATION

=Whatever study u have done, sometime luck may be against you

=So diversify in 10 to 20 stocks

19…HOLD STOCK FOR LONG TERM

=To net a 100-bagger, you need to hang onto a quality stock for a number of years

= A more likely journey will take 20–25 years for 100 baggers

=If you buy a stock that returns about 20 percent annually for 25 years,
you’ll get your 100-bagger. But if you sell in year 20, you’ll get “only”
about 40 to 1—before taxes. The last five years will more than double your
overall return (assuming the annual return is constant). So, you must wait.
This is not to discourage you. You can earn great returns in less than
20 years. But I want to get you to think big.

20…BUY BUT DONT FORGET

=Phleps do not recommend putting them away and forgetting them

=Peter lynch also recommends holding stocks until fundaments deteriorate

=Check your investment thesis at regular interval

=What if you don’t get a hundredfold return? The point of Phelps’s brilliant teaching method is to focus your attention on the power of compounding until fundaments are intact. After all, even if you catch part of a 100-bagger, the returns could fund a retirement.

21…EVERYMAN’S APPROACH

=JUST HOLD ON GOOD QUALITY STOCKS IS EVERYMAN’S REPLICABLE APPROACH .

=Very few people are successful traders while there is long list of successful investors

=In the markets, you can find all kinds of crazy success stories, such as
the improbable traders of Market Wizards fame—including Jim Rogers,
Paul Tudor Jones and Michael Steinhardt—. These never interested me, for many reasons, but one big reason is they struck me as freakish. The gains were enormous, but the process was not replicable—certainly not by the everyman.

=You’ve also seen how ordinary people can achieve the lofty returns
of 100-bagger dom by simply holding onto good stocks. You don’t have to have an MBA or work at a hedge fund.

=It seems so simple, but few actually ever achieve it by holding for years

=To make money in stocks you must have
…“the vision to see them,
…the courage to buy them and
…the patience to hold them.”
… According to Phelps, “patience is the rarest of the three.

22…COFFEE CAN PORTFOLIO

=You take some portion of your money and create a “coffee-can portfolio.” What you put in it, you commit to holding for 10 years. That’s it. At the end of 10 years, you see what you have. Coffee-can experience
says you will have found at least one big winner in there.

=Of course, investing in the buy-and-hold manner means sometimes you will be hit with a nasty loss.

=But that is why you own a portfolio of stocks. To me, investing in stocks is interesting only because you can make so much on a single stock

=Coffee-can theory says you’ll have done better this way than if you had tried to more actively manage your stocks.

=Knowing this, you need to find a way to defeat your own worst instincts—the impatience, the need for “action,” the powerful feeling that
you need to “do something.” To defeat this baleful tendency, I offer you the coffee can as a crutch.

=I’m a big fan of the coffee-can approach

23…YOU SHOULD BE RELUCTANT SELLER

=If you are hunting for 100-baggers, you must learn to sit on your ass.
Buy right and sit tight.

So when to sell

In his book Common Stocks and Uncommon Profits, Phil Fisher had a
chapter called “When to Sell.”
…If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never.”

=But even Fisher allows thrre and only three reasons to sell:

A…You’ve made a mistake in original purchase

B…The stock no longer meets your investment criteria(change in fundaments)

C…Better opportunity

… Switching is treacherous .
Every stock that’s moving looks better than the one you’re thinking of selling. And there are always stocks that are moving.

…Investors too bite on what’s moving and can’t sit on a stock that isn’t going anywhere. They also lose patience with one that is moving against them. This causes
them to make a lot of trades and never enjoy truly mammoth returns

=So in summary

“If you’ve done the job right
and bought a stock only after careful study, then you should be a reluctant seller”.

24…DONT SELL WHEN

=STOCK IS TOO HIGH OR HIGH PE
=STOCK HAS FALLEN
=STOCK IS GOING NO WEHERE

(Stock price is not indication for reason to sell)

A…STOCK IS TOO HIGH OR HIGH PE

=During periods of rapid share price appreciation, stock prices
can reach lofty P/E ratios. This shouldn’t necessarily discourage one from continuing to hold the stock.

B…STOCK HAS FALLEN

=Monster Beverage became a 100-bagger in 10 years,
…I count at least 10 different occasions where it fell more than 25 percent during that run.
… In three separate months, it lost
more than 40 percent of its value.
… Yet if you focused on the business—and not the stock price—you would never have sold. And if you put $10,000 in that stock, you would have $1 million at the end of 10 years

C…STOCK IS GOING NO WEHERE

=Sometimes stocks take a long time to get going. Phelps had plenty of examples of stocks that went nowhere (or down) for years but still delivered the big 100 to 1

25…TIMING MARKET

=Mr. Lynch has taught us - ‘’Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves

=Phelps also stands against market timing. He told me about how
he predicted various bear markets in his career. “Yet I would have been
much better off if instead of correctly forecasting a bear market, I had focused my attention through the decline on finding stocks that would turn $10,000 into a million dollars.”

=Because of his bearishness, he missed opportunities that went on to deliver 100 to 1. “Bear market smoke gets in one’s eyes,” he said, and it
blinds us to buying opportunities if we are too intent on market timing

26…DIGEST VOLATILITY
(UPS N DOWNS)

=The biggest hurdle to making 100 times your money in a stock—or even just tripling it—may be the ability to stomach the ups and downs and hold on.

=The problem isn’t only that we’re impatient. It’s that the ride is not
often easy

=Netflix, which has been a 60-bagger since 2002, lost 25 percent of its value in a single day—four times! On its worst day, it fell 41 percent. And there was a four-month stretch where it dropped 80 percent

= Apple from its IPO in 1980 through 2012 was a 225-bagger.
But . . .
Those who held on had to suffer through a peak-to-trough loss of 80
percent—twice! The big move from 2008 came after a 60 percent drawdown. And there were several 40 percent drops. Many big winners suffered similar awful losses along the way

27…DONT GET BORED

=People often do dumb things with their portfolio just because they’re
bored. They feel they have to do something

=Why do people buy and sell stocks so frequently? Why can’t they just
buy a stock and hold it for at least a couple of years? (Most don’t.) Why
can’t people follow the more time-tested ways to wealth?

BECAUSE PEOPLE GET BORED

=People get bored
holding the same stock for a long time—especially if it doesn’t do much.

…They see other shiny stocks zipping by them, and they can’t stand it. So they chase whatever is moving and get into trouble.

=Wanger used to say, investors
tend to like to “buy more lobsters as the price goes up.” Weird, since you
probably don’t exhibit this behavior elsewhere. You usually look for a deal when it comes to gasoline or washing machines or cars. And you don’t sell your house or golf clubs or sneakers because someone offers less than what you paid

=Usually the market pays
what you might call an entertainment tax, a premium, for stocks with an
exciting story.

=So boring stocks sell at a discount. Buy enough of them

28…DONT CHASE RETURNS

=Don’t try to chase returns, because
doing so will cost you a lot of money over time

=There really isn’t anything intelligent to say about returns over months or year

=Besides, who cares about one year?
…You have to play the long game.
…There are approaches and investors who have beaten the market by a solid margin over time.
…The thing is, they seldom beat the market consistently

=The best investors lag the market 30–40 percent of the time

=None in the superstar investor group always beat the S&P 500 probably because no
one thought that was the primary objective.”

=As I say, there are ways to beat the market over time. But none of
these approaches always beats the market.
…Even the best lag it, and often.

=As an individual, though, you have a great advantage in that you can ignore the benchmark chasing.

=Keep that in mind before you reshuffle your portfolio after looking at year-end results. Don’t chase returns! And don’t measure yourself against the S&P 500 or any other benchmark. Just focus on trying to buy right and hold on

=Invest like a Dealmaker.

=Most people chase returns.
…As an example,
consider one of my favorite studies of all time, by Dalbar. It showed that
the average mutual fund earned a return of 13.8 percent per year over the length of the study. Yet the average investor in those funds earned just 7 percent. Why?
=Because they took their money out after funds did poorly and put it
back in after they had done well. Investors were constantly chasing returns

29…DON’T GET SNOOKERED:
AVOID SCAMS

A…MANAGEMENT

=Reading conference-call transcripts is better than listening to them(visiting them).

=In summary, it is “best to keep management at a distance.

B…On Boards

=Boards are supposed to represent shareholders, but they don’t. As Block said, there is a symbiotic relationship with CEOs. Board members often
view their directorship as a perk, not a responsibility. Insurance and other
protections insulate boards from liability.
=Moreover, board investigations into misdeeds are unreliable. When
boards have to investigate something, it’s like asking them to admit their own incompetence, Block said. You can’t rely on them.

C…Lawyers
Lawyers “make it difficult for investors to make good decisions.” They represent the interests of their clients—the people who pay them—not investors.
“‘Prestigious’ law firms are a surprisingly effective fig leaf,” Block said.
They are great at writing indecipherable prose. And the attorney–client
privilege “hides innumerable acts of corporate wrongdoing.”

D…Auditors
“Auditors are completely misunderstood,” Block said. Again, they represent the interest of their clients—the people who pay them. I’m reminded of the old saying “Whose bread I eat, his song I sing.”

Block talked about how it is a profession that rewards failure. Negative audits often lead to lifetime employment because the firm is fearful of being sued and wants the auditor around to help get it out of any messes.

Further, Block said, accounting is “a profession fighting against
accountability and transparency. They [the big auditing firms] fight disclosures repeatedly. They do not want to provide investors with a better window into audits

E…Investment Banks

=Obviously, the investment banks have an incentive to sell financial products—stocks, bonds, and so on. They are not looking out for your interest.

=If you don’t know this by now, here it is: don’t look to research put out
by investment banks or brokerage houses as a source of advice on where you should invest.

F…Market-Research Firms
This one was interesting because you often see “market research” quoted
from the likes of Frost & Sullivan and iResearch. Block said companies
hire these firms and often give them the research to get the report they
want. Market research is there to add legitimacy to management’s claims.
It’s not to help you make a good decision.

Distrust market research. Look for more objective sources of information, such as actual sales data and trends.

30…DO IGNORE FORECASTERS

=One large study covered nearly 95,000 consensus estimates from more than two decades. It found the average estimate was off by more than 40 percent

=David Dreman writes about this in his book Contrarian Investment
Strategies. Digging deeper, he finds the analysts made consistent errors in one direction: they were too optimistic

=So if you put the two together, you quickly come to realize the odds of
you owning a stock that doesn’t suffer a negative earnings surprise is pretty small.

=Many people spend a great deal of time trying to guess where the
economy or the stock market is going. And yet, there are countless studies that show the folly of such forecasting

=They have missed every recession
in the last four decades

31…IGNORE MACRO

=There is a world of noise out there. The financial media is particularly
bad. Every day, something important happens, or so they would have
you believe.
-They narrate every twist in the market.
-They cover every Fed meeting.
-They document the endless stream of economic data and reports.
-They give a platform for an unending parade of pundits.
-Everybody wants to try to call the market, or
-They predict where interest rates will go or
-They predict the price of oil or whatever.

=My own study of 100-baggers shows what a pathetic waste of time this all is. It’s a great distraction in your hunt for 100-baggers.

32… MARKET CRASH-HUGE OPPORTUNITY

=2008 like disasters create “easier” opportunities to make hundredfold returns

MY JOURNEY

I have started my investment journey in 2017 bull run.I have paid my tution fees by learning from my initial losses. Then i started reading books .I am deeply inspired by two books

1…One up on wall street by peter lynch

2…100 baggers by Cristopher mayer

=One up on wall strret is very popular while 100 baggers is still less known to people.

=This book inspires us to invest for very long duration like 20 to 25 yrs and find out 100 baggers( repeat 100 baggers Not 10-20 baggers).

=In today’s era,where young people hardly stay invested for 6 months ,20-25 yrs investment in same stock is next to impossible for most of people.

=IF WE FOLLOW THESE PRINCIPLES AND STAY INVESTED FOR ATLEAST 5-10 YEARS, IT WILL MAKE GREAT RETURN

=At last, i am also very new to market with 4 yrs experience and trying to follow these principles.

This is my latest portfolio

63 Likes

Wonderful summary. In short…a test of grit , perseverance and patience which is uncommon in the current era of instant gratification.

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Thanks a ton , this book is in my todo list but you summarize it so well. make me wanna read it soon.

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Very Well summarised and presented Dr Shah . One of the most brilliant books ever written on 100 baggers .

thanks for a superlative effort

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@Pragnesh,
Thanks a lot for the excellent summary of the book’s contents.
It cleared my mind of the thought to sell my biggest investment, my company’s RSUs and ESPPs, due to the current Ukraine-Russia situation which could spill over to Taiwan-China leading to affecting my company’s sales, profit and thereby the share price.

Would love to read more summary of other books you have read / reading.

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Thanks for the great summary. Doesn’t Point #29 reduces almost all sources of information that are available for the retail investors.

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Sure it does. The most important point is not mentioned… you need to be lucky. No amount of process and chapters of seemingly practicable theories can ensure a hundred bagger . Even if you buy one , the intervening years can do enough(A bad couple of years for the business, apparent CG issues, blast in the factory, you needing the money or spotting another potential hundred bagger) to make you sell it .

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on that line…i heard somewhere that getting 3-4 bagger is part of skills and analysis or more information etc…But getting 100 baggers is total luck…Because even the promoter and even the Managing director also dont know whether their company will become 100 baggers. Its sheer luck and randomness playing its cards. Not even God ( if at all he exist) can predict the outcome of randomness…whether 100 bagger or 1000 baggers.

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Hello, can a learned member explain why super high ROCE stocks like Castrol and Exide are available at cheap valuations?

A similar high ROCE stock like Coal India remains cheap maybe because its a PSU and doesn’t have pricing power?

Talking about the criterion of selection, it about high ROCE + high PAT growth + high sales growth?

Another thing i noticed is many PSU stocks appear in a high Piotroski list, but are largely unattractive to investors, why?

You can check fate of RIL vs ONGC and even SBI vs HDFC (SBI is still better off, imagine PNB or BoB) over last 20 years or more.

ONGC once used to be among top 3 companies by market cap in India and TCS, RIL and ONGC used to compete for numero-uno position…the trajectory hence can be seen…

1 Like

Some of the reasons for high RoCE stocks trading at cheap valuation

  1. Business sustainability - can this business be in the current form
    and generate similar revenue, profit, and cash-flow for 10 to 20 years
    Ex: Castrol - threat of EV vehicles.
  2. lack of growth - many of high RoCE companies are in mature phase
    and lacks growth (sales & profit)
  3. Investor sentiments - during market euphoria, “high quality low growth” stocks are out of favour; investor run behind “high growth”
    stocks.
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In addition to what @Lotus mentioned: Ltd. current market opportunity and diminishing demand due to upcoming alternatives. High ROCE is super attractive only if business has reinvestment potential as that results to exponential (compounded) earnings.

6 Likes

Thanks.
Various fundamental screeners on screener.in and elsewhere (valuation/PE/OOCE/P score etc.) are crowded with PSUs like CIL. Presence of these companies (where pricing power is in the hands of the government) defeats the purpose of the screeners as PSUs never perform and one can be misled.

Not always true…
Examples…
OIL has gone more than 3x from 2020 lows
Sail had gone 7-8x
Nalco from 27 to 100+
PTC from 49 to 137
BEL from 70 to 200+
Lots of other PSU stocks like IRCTC caught market fancy and was 5 bagger
Its not screeners fault .Beauty of the stock lies in the eye of the investor as its him who only knows what he expects of the stock.

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@Ghonarbochon That’s the point! The difference comes from how we look at stocks. That’s why it is recommended not to follow the herd mentality.

Hello, can a learned member explain why super high ROCE stocks like Castrol and Exide are available at cheap valuations?

Valuations are always forward looking. Valuations factor in :

  1. Intensity of future free cash flows
  2. Duration of free cash flows (Renewables > Fossil fuels; If D/E too high, whether company will remain a going concern or not is factored into valuations)
  3. Certainty of free cash flows (FMCG certainty > ICE engine certainty) and
  4. Discount rates (An overall measure of how risky are these cash flows)

All metrics that we use for valuation normally including P/E and ROCE are only heuristics for intrinsic value. They are all backward looking and imperfect estimates. So depending solely on them to value a company can sometimes lead to mistakes.

When market disagrees with metrics, always try to do a rigorous analysis of the company’s future prospects. If future prospects are bright and market has been lazy to recognize it, pile on. If future prospects aren’t bright and market has baked that in, don’t go to war with the market.

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Companies like Castrol are being disrupted due to ev adoption. Castrol makes engine oil which is not required in evs. already ev scooters can be seen in roads a lot. Sooner or later ev 4w will also be seen a lot. this is why Castrol, gulf oil lubricant are being derated since 2015 inspite of earnings growth. This is a classic value trap. Maybe ev adoption will happen very fast or it will take very long time as Castrol mgmt tells. But market thinks it will happen sooner or later though it might not happen due to ev battery requires rare earth metals mining of which causes pollution. or it may happen due to some innovation. so in short the longivity of these companies are uncertain hence the derating of valuation inspite of earnings growth. So stay away from sectors which are being disrupted.

Another example is printed media sector which js being disrupted due to online media. the stocks db corp, jagran Prakashan, Hindustan Media Ventures these are derated due to this.
Then you have the classic example of kodak being disrupted due to digital cameras and kodak didn’t change it self to adopt. You have nokia being disrupted due to advent of android and nokia not adapting to android. Mechanical printers being disrupted by xerox and digital printing. such examples are plenty. so just because a company looks cheap bsed on pe ratio or dividend yield always ask why it’s cheap? is it because of the whole market is fallen , if yes then ok. if no then you should dig dipper.

sometimes it’s due to temporary negative sentiments. For example ITC was in downward trend since 2019 due to negativity regarding the cgrt business due to imposing of tax and esg concerns. but the truth is ppl wont stop smoking even if the cost of cgrt increases. at most they will switch to illegal smuggled cgrts. sooner or later govt realised it. on the other hand itc has the fastest growing fmcg business which was completely disregarded. it was a classic value by. and look at it today. those who had bought it between 2020 and 2021 have 50-90% gain + 10% dividend.

Similar pattern now happening with hdfc bank and hdfc. they are trading at historical low valuation. the business is fine. but there is negative sentiment due to the proposed merger and growth slowing down due to size and other regulatory issues. but the truth is the merged entity will be easily able to grow at mid teen rate. Sooner or later reversion to mean will happen and the stock will be rerated. this coupled with earnings growth should easily give return similar to itc.

Disclosure: invested in both itc and hdfc/hdfc bank. was invested in Castrol & gulf oil but sold quickly due to crude oil price hike (though didn’t understand at that time the concept of the sector being disrupted).

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Hi,

Thank you for this thread. It’s very informative.

While we can easily check if the business is consistently generating high return on capital, I am little confused on how to judge if the company has been reinvesting in the business growth. Which financial metric can be the best indicator for this behavior.

I am thinking that topline growth, low dividend, increase in fixed assets could be some proxy metrices. But wondering if there is a more direct metrics that I am missing.

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See Capex

See fixed asset in cash from investment

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