Dear Hitesh Sir, do you also agree with this statement by @ChetP
“Feel like this is the best time to convert from large caps to mid and small caps.” because of their valuations compared to mid and small caps.
About reading books, I think the first time is usually to try to figure out what the author is trying to say. And whether it resonates with us. The second reading usually is much more rewarding in terms of what we can grasp from it. More so because we read it a second time only if we feel its worth reading again.
With books like One Up On Wall Street, there are so many examples and anecdotes Lynch has quoted that sometimes we could correlate some companies or situations which we see currently with what he described in his book. This situations may not be there at the time of initial reading.
I think re reading tends to reenforce the mental models we have framed while reading these books and tweak them if needed. For me these things tend to occur subconsciously as i read these books because many a times I recall similar situations a long time after reading these books.
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Thanks so much HItesh bhai. This was very helpful
I agree with ChetP’s view that it might be the time to move gradually to small and midcaps.
I think there is consensus optimism related to large cap high quality companies. This has caused a strong run up in these type of companies since past nearly 2 years and that has taken valuations to levels where even optically good results leave little in terms of positive surprise.
And in sharp contrast to this, the small mid cap space has been treated with so much scepticism that valuations in a lot of companies which have reported very decent numbers since past many quarters or where structural changes in business model/promoter/management control etc are taking place. But since there is no price momentum post these stellar results, nobody is interested in buying these. I consider this as a sort of apathy to small midcap space. I think a lot has to do with the fact that hardly anyone has made any decent amount of money in these type of names since past 18-24 months. But reversion to mean is a strong model and almost always plays out albeit with a lag period. Atleast that’s my view and I may be wrong but that’s my working hypothesis on which my preference for small midcap space is based.
And most gurus have advocated to buy when no one else is interested to buy. And to that one can apply the theory propounded in The Next Apple or How to make money in Stocks by William o neill. Both books tell us to look out for companies showing a lot of strength by making new 52 week or new all time highs. (One can even look at companies making one month or 3 month or six month highs and having sound sustainable business models. ) To this can be added companies which display strong bullish/reversal patterns like cup and handle breakouts, flag breakouts, inverted head and shoulders breakouts or rounding bottom formation, or double or triple bottoms. All these patterns should ultimately lead to reasonably decent companies in small and midcap space. That’s how I prefer to look at things nowadays.
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Hitesh bhai, whether the large caps which report consistent high growth , would they also be correcting or one can continue to hold them ?
Also regarding recent issue of Bajaj Finance due to Karvy , do you feel it could have been avoided ? Whether Bajaj Finance could have found out whether the shares pledged by Karvy were of its clients and not its own ?Although the current impact might not seem to be material , but whether are there chances of major loss if lending was huge ? A company like Bajaj Finance is known to be quick in curtailing risk . Am i missing something here ? Why dont they reduce the corporate and focus more on retail ?
In light of what could have been , do you think this will have an impact on investment thesis ? Request your guidance Hitesh bhai . Many thanks
Long term compounders need to have consistency and predictability in their growth and earnings. And markets need high conviction that they have a long runway for growth. With these companies even if they miss results for a quarter or two, markets give them a longer rope. That is because of proven track record in the past. An example that comes to mind immediately is Page Inds. There were a couple of quarters where the results were considered a bit iffy. And barring the knee jerk short term reaction, it seemed business as usual. If one considers the levels of 36k in Page, I think that was excessive euphoria and valuations had gone beyond normal range. And once they had come within range again, there was a strong appetite for it. Same applies to a lot of other similar names and will play out over various time frames.
About compounders in cyclical industries. these companies exhibit strong business models within cyclicals or peer groups. It doesn’t though make them immune to cyclical factors. The only thing it does is that while all run of the mill cyclicals crash 50-70-80-% from top during downswing. these better quality companies will correct to a lesser extent as the markets have higher faith in them getting back on track once the cycle turns. But if one wants to play cyclicals the best thing to do is try to figure out turning point of the cycle (easier said than done 
) and somewhere near the bottom or slightly higher up, buy a basket of companies with higher allocation to the better quality company and a couple of stocks which have corrected a lot with lesser allocation. A rising tide lifts all boats in case of cyclicals and most of them will fly. Compounding by itself is difficult in cyclical compounders as one has to get the cycle right Whereas in the case of proven long term compounders one is not too worried about cyclicality.
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Hi Hitesh,
Do you still hold Hikal? just thinking, when there is sudden fall in stock price, what approach someone should take?
Thanks,
Milind
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This one can have an impact on pharma industry as a whole if any negative outcome comes…
@hitesh2710 any views?
Metformin is such an excellent drug, it would be so difficult to achieve the glycemic Control this one offers in ohg regimens amoung t2dm patients,not to mention the dyslipidemic properties of it on polycystic ovary syndrome which is the most common gynaecological disorder these days among reproductive age group, I hope the investigation comes out clean.
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@hitesh2710, what do you suggest. Is it time to buy small/mid cap funds or wait for gdp/inflation before making a move. Otherwise, do you suggest to hold cash for time being
I had exited hikal some time back post dismal q2 fy 20 numbers. Mainly considering opportunity cost.
@mambajamba, Rites remains one of the better placed PSUs to ride the capex in rail infrastructure.
@Capsule91 The way NDMA figures as an impurity in a lot of molecules, I think while evaluating a pharma company it might be a good idea to look at products where the possibility of NDMA impurity is there. As happened with ranitidine, post the initial scare I think in metformin too this should pass over if anything emerges out of it. Companies will devise ways to reduce the content of NDMA in their produts to make them safe to use.
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Regarding moving into small-midcaps, I think I have posted my views 5-6 posts back. Putting up anything here would be only a repetition. Suffices to say I am now mostly invested into small and midcaps.
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Hello Hiteshji, what is your view on PI Industries (in midcap theme)? It has been hovering around life time high for some time now. While some brokerages have turned cautious after the run up in the last one year, management is fairly bullish on the CSM business. Management quality is also very good and they have made sure they dont venture in to commodity chemicals business in response to Chinese supply situation a couple of years back and stayed where their expertise is. Do you think it is ready for a pause/correction now or ready for the next leg of the run up? Thanks…
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Hello @hitesh2710 sir, what are your views about jamuna industries and prakash industries?
I am hoping jamuna industries to make a comeback when conditions turn favourable for autos.
Prakash industries are posting good numbers (except last two!) Regularly still going down due to governance issues.
PI Inds has managed to report very good numbers since past 4 quarters with a lot of consistency. And it has been rewarded in terms of price action. But there is a limit to the kind of valuations any company can command. When valuations go out of whack, high quality stocks tend to go into sideways range.
screener.in has recently introduced a very useful tool in its charts section. It provides PE range charts which provides a historical chart depicting PE given to the company and that provides us with an idea where the stock is likely to face some sort of roof to valuations. If you have a look at the PE chart of PI Inds, the answer to your query will be self evident as its crystal clear.
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Jamna auto makes ancillaries like leaf springs mainly used by commercial vehicles. The whole CV space itself is facing big headwinds and hence i cannot see Jamna doing any better. At some point it can be a value buy but I cannot figure out what that level is. Once the CV segment turns it can provide decent returns.
Prakash Inds had been mired in promoter integrity controversy. The current market has been very discerning in terms of meting out special treatment to any company having any issue with corp governance. So its better to stay away till the market mood towards these companies change.
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Last 5 lines are very important
With respect to Jamuna auto and Prakash industries post
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Taking example of PI, assuming stock has peaked out in short term, if one has no better idea to invest in, what would you suggest one should do, stay invested or move back to cash?
Sir Please give your views on CARE Rating and Radico Khaitan
There will be times in a compounder stock’s price journey when it will go into a sideways move or in a short or medium term correction. Problem is we don’t know when this will happen and when this will finish. Except in cases where we feel we have figured out next couple of years’ earnings and there is not much upside left based on higher range of historical valuations given to the company. In the latter case, its advisable to sell or book profits partially and either sit on cash or find an alternative with better risk reward ratio.
But sometimes markets have a mind of their own and tend to surprise us on the way down or up. That caveat applies in most situations.
@nsetiger I dont track either Care or radico khaitan.
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