@nagesh_reddy the list is mostly a value play. most of us in this forum focus mostly on businesses which are on the cusp of high growth or are growing rapidly. but decent, established and somewhat boring businesses with consistent performance year after year can contain huge value when underpriced. And exaggerated underpricing do happen time to time when markets fall or some quarter numbers are bad.
The list assumes - a non-commodity business with zero to moderate leverage - with consistent return on equity over the years will most likely have similar returns in the next 3-5 years atleast. (Unless their industry is under disruption or there is black swan that we are not aware of).
Now, knowing the approximate return on equity capital in the coming few years, it’s easy to calculate the intrinsic price. For e.g a business with an average roe of 15% over the years…we can expect it to deliver a compounded return on equity of at least 12% over the next few years. A business which returns 12% can be expected to trade at a price to book of about 2.75. so if it is trading at say 1.5 p/b …we can safely assume it is underpriced and expect the price to correct on the upside in the next 3-4 years. In the above scenario, the price of this security after three years would be around 2.75×1.09^3 = 3.56 (using 9% as the discount rate in the DCF model). with a current price of 1.5, the return expected is 3.56/1.5= 2.3x …so a 2 to 2.5 bagger in the next 3-4 years. This assumes 12% roe. Anything more would be a bonus surprise.
Hi Jayesh,
There is no particular reason for not having Financial sector stocks.
Basanth Maheshwari in his book ‘The Thoughtful Investor’ says that there are many stocks in the market that give 15% return but 20% and above return is rare. The compounding effect of high growers over longer periods is a clear advantage. I was concentrating more on > 20% growers, which are in small to mid cap category that are leaders in their category and are growing revenues at a fast clip and which are not widely recognized. At the same time I wanted to restrict the stocks to 10.
I like to have Capital First, Indiabulls Housing, CARE and MCX from the sector in the portfolio but not willing to let go the existing stocks. I consider the existing stocks are secular growth stories and are likely to expand EPS and PE multiples for a long period.
Of course nothing can be taken for granted, the performance is to be monitored periodically. If a compelling opportunity in financial sector comes along, it would be included by replacing the under performers in the portfolio.
Looking for an exciting stock from the sector.
It looks promising, but now I have very small (about 2%) investment interest in it. I may increase investment based on the performance of the company.
As the investment is insignificant and is a tracking position, not included in the above list.
I may increase or I may come out of the stock also, depending on the performance and relative opportunities.
Not getting enough conviction to increase the holding. This is the limitation with tiny caps.
I would also like to mention that most of the companies are already trading @ high P/E and therefore offering no Margin of Safety. Further, what are chances of generation of higher returns by virtue of PE re-rating? I like many of these businesses, but would like to know your rationale on valuation front.
Three things that were talked about by Basanth Maheshwari are relevant here
1 If the investment is in a small cap or a not so popular mid cap then one should be more comfortable buying an initial allocation at the current price and then wait for the stock to deliver better earnings growth to add more.
2 It makes sense to buy a good business at the market price rather than a bad one at a discount.
3 The trick to buying most of the secular growth names is to pay a little more for what is worth today and hope to make good the difference through steady and consistent growth.
And another sentence from Basant ‘trying to find best business at the lowest valuation is an excercise that remains unacomplished almost all the time’ is worth keeping in mind.
Very good companies identified. However as Jayesh mentioned, P/E for stocks are quite high and need to do exceptionally well to give reasonable returns. Very good stocks but may be not the right timing?
I’m novice in this aspect, yet I can’t be sure whether Symphony, Avanti, Tasty and Advanced Enzyme can be described as “not widely recognised”.
It’s no doubt that all of them are strong business, but I feel most of their positives are already priced in. In other words, market is expecting to deliver them to perform atleast 30% growth, failing which the stock might decline/remain sideline for sometime.
Yes you are right to some extent, but these stocks were always seen with suspicion and had certain skepticism built into them.
The addressable market and sustainability of growth in Symphony was always always under estimated by the market. It was perceived that the company can not move up value chain as it would be competing with AC makers at the higher end of cooler market and of late the argument was about the entry of Voltas, Havells, Milton, Crompton, Orient etc. but the company proved its business model and performed consistently. I feel that the Centralized air cooling is big opportunity which is not priced in.
Avanti, though performed consistently it never commanded premium valuations as it is seen as a cyclical play susceptible to deceases and natural calamities. But the company’s track record over a long period speaks for its robustness despite the inherent drawbacks.
Tasty bite: The traded volumes in the counter are hardly few hundreds a day. Very recently only it was listed in NSE. It cannot be considered as widely recogized stock.
hi, I am also new in share market, as per m analysis, yes the above mentioned point about advanced enzymes are spot on, it will be future multibagger. high chances, though I am not invested in it, only concern is last quarter of FY 16, it is trading at high volume, not sure, the reason, and I am personally waiting for some correction to happen.
can any senior please provide his views on why it is trading at such high price…thanks in advance
I found Lypsa Gems in the thread interesting. The rationale or special condition is that management changed the strategy from selling volume driven low cost products to selling high margins products. This approach seems reflected in the recent Qtrly reports
Agree with your thought, I am also following up the Lypsa story. The promoters have increased their holding Q-O-Q
Last Jun Q it was 36.06 and this Sep Q from the shareholding declared it is 36.22
I have begin my journey into stock investing, can someone with more experience dismantle the annual report and let highlight any red flags would be greatly helpful.
