ValuePickr Forum

An aggressive contrarian portfolio

Hi,

I am new to this forum. I am a professional investment manager and trader. I would like your opinion on this portfolio which is heavily concenteated in financials. I am trying to exploit the current market opportunities.

Market Assumptions:

  1. Liquidity squeeze is short term.
  2. Upward interest rate pressure is going to decline in India.
  3. Global trade war rhetoric will subside in coming months.
  4. There is no imminent global recession.

Portfolio :

Yes Bank : 20%
Tata Motors : 17%
Sun Pharma: 15%
Ujjivan: 13%
Indiabulls Housing : 13%
Repco home finance : 11%
DHFL : 11%

Rationale:

I believe current turmoil in markets because of IL&FS default and DHFL CP sales is short term in nature. Periods of liquidity squeeze in Fed taper tantrum in 2013 and demonstisation in 2016 didn’t last long. I believe with dovish Fed and low inflationary pressure in India, liquidity will be normal within next 3 months

Stock wise:

Yes Bank : Board room tussle. Everything should be clear by 31st Jan. Stock trades very cheap compared to peers. Growth rate impeccable and foray into retail banking should support growth.
Concerns : Cooked books, unethical practices

Tata Motors : Deep discount to book value, domestic business turning around , street is expecting worse out of trade war, Brexit and global auto sales peaking out
Risk: With FCF negative, if demand continues to slow in China and Europe, global turn around would be challenging

Sun Pharma: Dealing with corporate governance issues. With more focus on speciality, revenue and margins should increase
Risk: SEBI re opening insider trading case which at best would provide opportunity to re-enter

Ujjivan: Impressed by management track record. Near term ROA and ROE under pressure because of branch expansion. With healthy NIM and solid execution, it provides a multi bagger opportunity
Risk : Loan waivers, liquidity squeeze

Indiabulls Housing: Numbers on paper are so impressive. ROA of 3% and ROE of 27%… almost twice of peers. The company should gain market shares and grow above industry
Risk : Cooked books , liquidity squeeze

Repco Home Finance : With high NIMs in its niche segment, the company should withstand any upward interest rate and credit pressure. NPAs are improving and regional diversification should minimise concentration risk.

Risks: Tepid growth rate

DHFL: Trading at steep discount to book. Unless something is very wrong with the company, it should do well. Low ROA are a concern. However, with a benign interest rate scenario, it should benefit and grow well.
Risk : Cooked books, liquidity squeeze

I will like to know your views and any suggestions. Time period for investment is 2-5 years.

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That’s a really aggressive portfolio, have yes bank,dhfl,repco and ujjivan from that,but the first two were purchases from 5 years ago and form 10% of the portfolio. Are these bets a significant part of your portfolio ? Iam not sure if they would regain their past glory, due to the stain of the past.

Dont u think 68% in financials is too much even for a concentrated portfolio?

They all are new positions. Weights are highest in yes bank and tata motors as indicated. Yes… it is very aggressive. I agree with you, it is going to be difficult foe them. For now, some of them are speculators’ stocks

These so called low quality lenders were street favourites before this crisis. I agree, having likes of Piramal and ICICI are much better quality wise but at the same time lower expected returns. I m betting on their reported numbers and assume they are correct. ROA like that of India bulls or Yes Bank are hard to come by at this valuation. How does one know market has not over reacted just based on the perception of cooked books ? If the fears of the cooked number dissipate as we approach earnings in new quarters, the street will value these names correctly.

Yes. It is very high. I will bring it down to below 50% as opportunities arise.

I, too, run an aggressive contrarian portfolio (by the usual standards). However, I shy away from leveraged cos (with very very few exceptions). My 2c: consider applying this aspect as well.

I do have Tata Motors DVR in my pf since a few years now. No financials, except HDFC Bank which I’ve been holding for something like 12years now. (minor quantity of DHFL bought around 2014 as well which is comfortably in the green).

Besides diversification which others have pointed out, you need to define the following as well:

  1. Time period, which you say is 2-5 years is a bit vague. What will make it 2 or 5 years?
  2. Do you rebalance? If so what is the strategy there?
  3. Will you buy more if it falls? (or if it rises?)
  4. What is the overall asset allocation? (Debt/equity/other strategies, etc)
  5. Will you sell individual scrips or the whole portfolio after 2-5 years? What is the criteria?
  6. What happens if new opportunities arise? Will you entertain them or this is a ‘fire and forget’ approach?
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It is a very risky portfolio having many leveraged companies.I haven’t found anything wrong with the the books of the lenders. Most of the lenders have been growing well with managed NPAs. I am well aware the NBFC sector is not gonna be investor’s favorites, so won’t probably attract as high valuations as it did. There is further risk of more regulations and NPA recognition.

Response to your questions:

  1. 2-5 years depend upon my analysis of imminent recession in global markets. It is subjective based on various factors.

  2. Yes, I will rebalance into new stocks as attractive opportunities arise in other sectors.

  3. Yes, I will buy quality names like sunpharma and tata motors if fall more. Unless there is a fundamental change in any story, i am inclined to buy more on fall. On rise, only if earnings going ahead are reasonably well and there r no further governance issues

  4. This is equity only portfolio. At the young age, I am willing to put 100% in equities. No steady income required from the portfolio

  5. I will sell individual names. This is not a buy and hold portfolio.

  6. Already answered.

It is an active portfolio. I will like to reduce exposure in housing finance and move to more secular growth sectors ( quality names r trading very expensive. I am not comfortable with that )

If banking is within your circle of competence and you know what you are doing than I think its perfectly fine to have this portfolio

Everyone understands a traditional bank but there are hardly any traditional banks today

If someone would throw you into one of these banks to manage a top position like CFO, COO, finance controller of any of these banks and you see yourself thriving there that means you have a circle of competence to understand.
If you would run away if someone did that to you, then its probably good to run away from these stocks as well
You do need to read the annual report of atleast last one year before investing and probably 4-5 years
If you got the gist of the companys operation on reading those than your rewards could be truely mind boggling
Lots of ifs there
Knowing what you understand or knowing your industry is a huge advantage.
Everyone can go to a bank and know how to deposit a cheque or withdraw cash but thats not really knowing how the bank operates
Frequently when I ask people offline on an investment they propose if they know the industry, they say its a bank. As if thats all there is to understand a bank.

Also if you really think banks generally are cylical and eventually will come out of their problems you need to read a very good book called Manias, Panics and Crashes: A History of Financial Crises (Wiley Investment Classics) - You can find it on libgen and its probably a read for a week but in a week you will have a good idea on why banks should be feared.

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when you say for some scrips have cooked books…are they out in public domain? yesbank and Ibull? If yes why would you take a bet on them? why would the FII’s and LIC hold huge chuck in yesbank still? Biased and looking for answer as i hold few 1000’s in both

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I am saying cooked books are a risk. I m betting that books are not cooked at all! However, markets seem to act as if there is quality issue with these lenders. My hypothesis is market is over reacting.

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Thank you for your suggestions.

I agree that banks are very cyclical having long term cycles. Excessive leverage in the economy and unchecked lending practices can kill them. The same happened with PSU banks in the last 10 years. At this point, i dont think either global or local corporates are excessively leveraged or there are worrisome lending problems with these lenders.

It is rare to see a contrarian portfolio here on VP. Most people play it safe by building a portfolio of yesterday’s winners hoping that future is going to be an encore of the past.

I also liked the fact that you have stated your expectations for next 2-5 years and these expectations also appear to be rational. IMO real risk in investing comes from having wrong expectations and you have already taken care of that.

There is one risk I can point out in your portfolio. IBHFL, DHFL and Repco are likely to be correlated with each other for the foreseeable future. They will either go up together or go down together. By having 3 positions, you have reduced unsystematic risks like cooked books (as all 3 are unlikely to have cooked books) but there is no protection against systematic risk of margin squeeze or real estate slowdown. Your expectations indicate that you don’t expect these risks to materialize in near future. You might as well reallocate Repco position between the other two.

Tata Motors is also another stock I considered but gave it a pass as I don’t see any immediate trigger for rerating. Domestic sales won’t move the needle for TM as Jaguar makes most of the sales. Global economy is likely to go into a slow lane. It has a huge debt load that will weigh the price down. Just my 2 cents.

There is a good overlap between this portfolio and the one listed here although my portfolio is not aggressive or as contrarian as yours.

Overall, good portfolio and more importantly a good approach to building a portfolio based on expectations about future than a reflections of the past.

5 Likes

Thanks for your suggestions.

Logic for keeping 3 HFC names rather than 2 is that risk of cooked book decreases woth 3. On papers, ibul housing really looks the best of three. But I still wonder how they are able to generate ROA of 3.x% while industry norm is 1.5-2%.

I agree Tata Motors is the most daring of all the picks. Likes of Motherson Sumi or Eicher Motors have far better earnings visibility while being at reasonable valuations. I am tempted by price to book of 0.6, of course, which is telling street is expecting continued losses in next few quarters. My bet is that India business has started picking up… standalone value of which is around INR 120. Rest of subsidiary except JLR have value of around 30 bucks. It means JLR shares are free at current price. Current sales are showing signs of worsening situation in China and Europe. Brexit poses challenge for UK sales as well. So yes, I m taking exposure in JLR for free in the worst of the situations. Any positive surprise out of receding trade war, soft Brexit , world not going into recession etc may cheer the street. Even in the worst of situations, price is too good to ignore for a brand like Tatas and JLR.

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I think your choices have been driven by availability bias as most of these choices have commanded media attention. The best choices are always out of attention span and short term memory of media and most investors.

Being a contrarian is the most misunderstood idea in investing. A true contrarian is not the one who takes the opposite side of the popular view. The true contrarian waits for things to cool down and buys when no one cares about and especially when the rest yawn. ~ Peter Lynch

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@anni23

I agree with you.

Come 2019, these stocks will be a distant memory. May be I am a bit early. Some of these stocks are traders’ paradise right now.

It pays to have aggressive contrarian portfolio to create wealth - and be more conservative to preserve wealth …

I agree with you on Tata motors and Sun pharma as value bets as hopefully their financial numbers is real reflection of their current business and we know what the problem is

On HFC esp non HDFC - these are indeed contrarian bets as we don’t know how big hole each one may have on their asset side … some of these companies can go to zero like it happened in 1990s and 2008s and some may do exceedingly well … In such companies you can enter them when all bad news has played up or first set of good news starts coming through …

On second rung private banks - we have to understand that Retail private banks is still favoured sector and these private banks are fallen stocks in favoured sector … Not a great place to be in .

The best contrarian bets are often market leaders in unfavoured sectors .

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What are your thoughts on telecom majors like vodafone idea and airtel?

Can be contrarian bets … RIL , Idea and Airtel … but high risk and high return bet

Why becos lot of disruption is happening there … It is tough sector to track

  1. Cable TV to Mobile TV
  2. From Dumb pipe to Smart pipe - Who will own data & revenues
  3. 4G - 5G will current players dominate next leg we don’t know
  4. Smart transportation , Cities - New B2b opportunities
  5. Many others …
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I agree, simply buying a company which is losing market cap, is in full public light but for bad news associated with it, is not investing at all.

Contrarian investors would have deep industry knowledge or insider information. They know something more than the general public which gives them the conviction.

Simply looking the other way and hoping things will start to lookup reveals a certain desperation in the investors psyche.

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