I found this method very intriguing I came across about a month ago(Im sure many investors have read about years and years ago!). I have been reading into quite a bit. It seems to have alot of validity. Im sure many senior members and VP members already know of it.
I could not find a thread and I want more opinions on this concept. It seems to be simple and straight forward. However there seems to be some short term volatility with regards to the method.
It is the coffee can method advocated by Ambit and Mr. Saurabh Mukherjea. I will attach the video it is a two hour video, I found it eye opening to say the least.
For those without the time Ill give you a brief on the method.
The coffee can screener is very simple. Sales growth of 10% every single year for the last 10 years (not cagr) ROCE of higher than 15% every year for 10 years. Companies passing this fliter will be considered for the coffee can portfolio.
The next step would be to obviously analyse if the company has a future and the moat is sustainable etc etc: The obvious stuff since the recommended holding period is 10 years. Post which one liquidates and repeats the process with new or same cos from the past decade depending on the screen and personal analysis.
Typically not more 30-35 cos appear on the screen at any given point/year when the screener is run.
Usually the names are well known companies.
The concept states that the PE of the business barely contributes to anything in terms of share price movement in the long run. As per the video, only 12% cagr of the gain in page’s share price came from re-rating the other 30% or so cagr came from earnings growth. And there are multiple cases supporting the same. One can read their newsletters the attached links for further clarity on this aspect.
They claim that this method outdoes the index over a 10 year period very very handsomely, by around 500 bps plus!
The logic behind this is if the nifty gives 15% cagr on avg over 10 years (they claim that 15% is the average index return for 10 years, however I think its closer to 12% no idea but even then…) and the nifty consists of certain cos with poor roce, cyclicals, poor capital allocators… if you weed these out by applying the filter in essence you will more than outperfomr the index.
They also lay huge emphasis on roce. As per their research published in the book “The unusual billionaires” ROCE is the single biggest driver of returns in the long run. Apparently superior roce is main driver of returns over a 10 year period. Superior revenue growth does not have as much of an impact over a 10 year period, obviously combining both regardless of valuations gives you significant out performance over a 10 year period. If the company has super roce over a decade that alone provides some pretty decent outperformance over the market over a decade as per the book.
In their book “coffee can investing” the coffee can PF has companies like asian paints, nestle etc: If keeping it simple and negating entry valuations can help us beat the index by such a large margin then what are we all trying to do?? Haha!
Ambit run their PMS based on this philosophy.
Please senior members and members alike let me know your views!
P.S since screener only gives cagr numbers I have pasted a screen with some tweaks that I have added. The screen was sent to me by @amangoklani it was shared with him by some senior VPers.
Sales growth 10Years > 10 AND
Sales growth 7Years > 10 AND
Sales growth 5Years > 10 AND
Sales growth 3Years > 10 AND
Sales growth > 10 AND
Average return on capital employed 10Years > 15 AND
Average return on capital employed 7Years > 15 AND
Average return on capital employed 5Years > 15 AND
Average return on capital employed 3Years > 15 AND
Return on capital employed preceding year > 15 AND
Return on capital employed> 15 AND
Market Capitalization > 800