My Portfolio : Not Generating Good Return : Suggestion needed

Kindly give me suggestion on my portfolio. I have a habit (bad) of churning the stocks frequently; thus I often sell the gainers and stay invested in laggards.
I like to make a portfolio for 3-5 yrs and my return expectation is 20% CAGR.

My Portfolio :

Banking - 31.8%
Axis Bank
Yes Bank
GRUH

Tobacco - 17.3%

ITC

Chemicals - 9.6%
Pidilite
Meghmani Org
Castrol

Food- 8.7

Britannia

Others -

HCL tech
FCEL
SRS
CESC
Dish TV
Granules
Sobha
Tata Motors(D)
Talwalkars
Emmbi Ind
Rajoo Eng

I know that my portfolio has too many stocks. Kindly help me to construct a long term portfolio that can generate 20% CAGR return.

Regards.

If your average portfolio generates 25% ROE, you will get 20% returns after DDT and CSR Tax, provided the market trades at the same PE ratio like today. RoE in India is different from developed world as all taxes are at the corporate stage for equity.

Market trading at 18.5 PE is possible as it is not too expensive. But that’s only large caps. Froth in mid caps, small and micro caps even today. PE expansion is only a bonus, don’t plan it from here.

So you need to ask yourself the following questions.

1, Is my portfolio an average 25% ROE in the next five years?
2. Are my stocks as a basket priced fair?

Banks and ITC need to be tested for these two questions, more than others.

Dear Deb,

If your objective is to compound wealth in excess of 15 - 20% CAGR for the long term your portfolio should hold steady compounders with high margin of safety in meaningful quantity (individually at least 10% of portfolio) like PAGE Industries, HDFC Bank, Sun Pharma.

I would personally avoid Axis, Yes, ITC, Meghmani.

You could replace Sobha with Indiabulls RealEstate - if you have a 3 to 4 year holding capacity - assuming they execute as per their vision, returns can be extremely good.

Ajanta Pharma can be a steady midcap pharma compounder too, especially if you have a longer term holding view.
I am not tracking SRS, CESC, Talwalkars, Emmbi, Rajoo so have no view on them.

Navin Fluorine should have very good earnings momentum over the coming 3 to 5 years, you could definitely add the same in meaningful quantity.

Disc: I am Invested in all recommendations provided to you. Please do your own due diligence and build your own conviction prior to investing. We are not wired to hold “Borrowed conviction” stories whenever markets turn for the worse.

All the best for 2016!

Best regards,

Aniket.

Dear Aniket,

Thanks for your suggestion.

I am holding my ITC shares for my next generation as I believe that this company will emerge as a great FMCG player and make money for us. This is a 100 year old company.

Axis and Yes is in trouble as the industry is going through a bad phase. My Yes bank holding has generated almost 100% return.

I like your suggestion on Navin Fluorine and surely I will add it.

Thanks again,

Regards.

No offense to Aniket.

You add Navin Fluorine on Aniket’s comments today.
Suppose Aniket forgets to post a comment at sell time, when will you sell?

If you are a newbie, I respect your learning curve, just like all of us are going through. But please maintain the sanctity of a value investor forum. If you want a sensible advice on portfolio churn, please pay a certified advisor and get sound advice. Don’t take our one line comments to buy or sell stocks. Do your analysis. Else you are only speculating on other people’s views, even if the other person happens to be a smart value investor.

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Hi @Value_Seeker,
I have few doubts on corporate governance of India-bulls group. Hence was bit surprised to see you long on it.
However, I have high regard for your investigative research and indepth understanding of businesses. It seems there is a learning opportunity for me here to learn divergent views on indiabulls.
Hence, can you please share your views on indiabulls housing from management’s integrity point of view.
Thanks

I absolutely second that Sriram and I take no offense at your comment!

My disclosure at the end of the thread states as much:

“Please do your own due diligence and build your own conviction prior to investing. We are not wired to hold “Borrowed conviction” stories whenever markets turn for the worse.”

All the best!

Dear Vikas,

Thank you for your kind comments: I am a learner :just like fellow VP boarders, and I have greatly benefited and continue to benefit from the quality discussions on the forum as well as pointers from seniors.

I refer to your Query linked to the Managements integrity first. The real estate sector transactions are such that there is possibly need for “creative accounting”. Most developers balance sheets if forensically analysed will throw up red flags. The integrity call that I took is that the promoters have a very good record of treatment of minority shareholders.

The first question is should we look at Real estate sector currently? Is the sector on the verge of a turnaround? My gut feel is yes.

There have been a number of large ticket lease / rental deals, sale / purchase of large parcel of rental yield properties. Commercial uptick is usually followed in 2 to 3 years by uptick in residential demand.

IBREL is a significant rental yield player with some stretch on debt.

IPIT: the Real Estate Trust of IBREL (IBREL holds 47.5% of it) has 3.3 mn. sq. feet with occupancy rate of 88% and rental yield of Rs. 160 psf. (Book value of investment 3250 crores)

The company has 30 mn. sq. feet under various stages of development. Realisable value of the same would be to the tune of 20,000 crores.

Considering expenses (incl. interest) and estimated cash outflows, as well as additionally assuming construction and operational cost of about 3200 Rs. per sf. against receivables, we see that current market cap of Rs. 3,000 crores is not at all representative of the true value of the company.

To get these ballpark numbers, and ensure that I was not making flawed calculations, I got detailed assistance from multiple acquaintances who are currently at senior level and well entrenched with big ticket names in the real estate sector.

Key Monitorables:

Monetising London Property (Purchased for 155 mn. GBP last year, however a prime locality property in the most resilient real estate market in the world, and should have no problem liquidating the same. In fact property prices in London have appreciated over the past year)

Sales at Panvel Project

Slow sales at Indiabulls Blu (Worli, Mumbai)

the bet that I am taking is that the management will execute and deliver, and minority shareholders will be rewarded too.

I trust this update helps.

Have a good weekend and best regards!

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“To me, an investment is simply a gamble in which you’ve managed to tilt the odds in your favor.”

  • Peter Lynch

I read this line almost everyday. I find it to be similar to Warren Buffet’s two rules.

All the advice I can give you is, always look for margin of safety. That is what every great investor from Graham to Greenblatt has been telling us.

Don’t get rid of winners unless fundamentals deteriorate. And don’t be shy in losing the losers.

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Dear Aniket,

Thanks a lot for detailed reply with solid reasons to be long on IBRL.
On the risk of generalizing things, I remember reading an article where, long back Veritas who is expert in identifying financial shenanigans published a negative report on Indiabulls, and then later on company’s management chased down Veritas guy and threatened him when he landed in india. His ordeal is shared in detail in that article which made me highly biased against their management. Below is the link. However, I think one incident (one side of story) shouldn’t be only factor to pass judgement on management, hence will keep your views in perspective also.

Thanks

http://articles.economictimes.indiatimes.com/2014-11-27/news/56515280_1_neeraj-monga-nitin-mangal-indiabulls

IF i remember correctly Indiabulls securities faced lot of heat from SEBI for trading in clients account in 2006-2008. I am also very very suspicious about that group. Even if shares look compelling I will never touch any share of that group as for a small investor management integrity is very important. Who knows whether they are cooking their books. But one thing is sure that it seems they have solid political backing. Anyway its investors choice .I am just putting my view. No investment in any indiabulls group share.

@vikskukreja

I will refrain from commenting on the Veritas Saga which is well documented. One input that we must all bear in mind is that there are two sides to every story and I have read as well as heard inputs about the other side too.

Ultimately, as stated earlier, for me IBREL or other real estate companies in India, may not have balance sheets that withstand forensics, but that is primarily the function of the economic landscape / cash transaction mentality in India.

After due research and varied discussions with informed and capable minds, I have concluded that the current “Value Arbitrage” should be bought into, and the risk / reward ratio are favourable for me as an individual minority shareholder.

I also want to state that it is necessary to monitor ongoing sales at key properties, and also keep an eye on ongoing development of the 30 million s.f. of projects.

I also want to clarify here again that any stock purchased / held needs to be monitored actively by individual investors. I appreciate that individuals may find this management is not congruent with their values and the stock does not offer “perceived margin of safety” to them, in which coruse of course they stay away. Any stock market investment has risks, and there should be no “blind” buys based on experiences shared.

The reason I offer inputs to fellow VP’ers is because this forum offers me great learnings and I like pay it forward - contributing inputs where I possibly can.

Best regards,

Aniket.

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@Deb,

Some of your picks are contrarian such as Axis Bank, ITC, Yes Bank which I track. In my opinion, currently Axis Bank has been punished by market due to high provisions for NPA and GNPA moving up marginally, and its exposure to some risky sectors. Other fundamentals of the bank, such as, substantial fixed fee income, good NIM and high CASA ratio are intact. This is high beta stock, so in such market, it corrects much higher but that is where opportunity lies. It can give you good returns from current levels or after another 10% correction. One needs patience with Axis Bank. Yes Bank looks fundamentally strong with low NPA/GNPA issues but with low CASA ratio, market sometimes offers it at discount. From current levels also, it can generate steady returns in next 3-4 years.

ITC is another such story, which may surprise all by doing well in FMCG space even though cigarette space may not do great going forward. Valuations are attractive at current levels after long time, and can remain in portfolio for stability in such market conditions.

One should also add some amount of HDFC Bank in such tough market conditions to protect down side of the portfolio. GRUH may give less returns from here as it is fully valued at present but it is the most reliable story in Housing Finance space.

You can consider some mid cap IT company in addition to or instead of HCL Tech to give boost to your IT part of the portfolio. Quality names such as Persistent, Mind Tree, Cyient can be considered from mid cap space.

Some stocks from mid cap pharma space like Torrent or Glenmark can also add value to your portfolio.

I do not track most of the other stocks so not able to comment much, but names like Castrol and Britannia would also restrict the downside in current tough market conditions.

That’s all for now.

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@Deb

I dont want to comment on individual stocks. If picked at the right price you have all quality stocks in your portfolio (Dont beat me up for calling Yes Bank’s quality despite its poor corp debts- Its a different story, if Yes Bank back was picked when it was languishing @ 400)

Secondly ,Churning out stocks is not a failure practice . Its jus how experts goad abt this to retail investors and scare them off , which is in fact true if the investor is naive

  1. Unless you are a full time investor , decrease the list to 10 or less trackable stocks

  2. Analysze the best case,worse case and ideal case secanrio for each of the stock’s sales and EPS for next 3 years.

Keep selling when the price exceeds 15% of Best case price and buy when it is 10% +/- of Worse case price. If it has fallen more than 10% of your worse case price its time to recheck your model

This worked for me to regularly sell stocks@40% profit during froth time and safeguard losses during the correction time. Its working for last 2 years for me, however thought missed some multi baggers during this bull run by selling early , but none the less they have been corrected recently which has provided belief in this strategy!

Some value buying has recently happened in IBREL, and this interview today further confirms the reasons for the ongoing rerating of IBREL.

http://economictimes.indiatimes.com/wealth/personal-finance-news/indiabulls-real-estate-looks-to-sell-40-in-london-property/articleshow/49344683.cms

Monetising London Property (Purchased for 155 mn. GBP last year, however
a prime locality property in the most resilient real estate market in
the world, and should have no problem liquidating the same. In fact
property prices in London have appreciated over the past year)

Disc: Not invested; but I follow London property market closely and can comment only on that point.

Based on the article above, and your disclosure of having purchased at £155m - and trying to sell 40% share at £100m - ie valuing their property at CMP ~£250m. That is quite a steep valuation in about 1.5years. Given that the Chinese buyers have dried up and re-selling their condos (essentially 1 bedroom rabbit holes) in the prestigious Nine Elms street [this is the place where Battersea Power station used to be - Pink Floyd ‘Animals’ album] - further the government are clamping down on buy-to-let and second property ownership by levying huge taxes. So, if they are planning on constructing selling condo’s, in a personal capacity, I would be circumspect about their valuation. London’s real estate market may be strong, but it is wobbling currently. The QE1/2/3 coupled with rock-bottom rates have caused huge asset price inflation, and savers with no resort to decent returns have pumped into the the housing market. When all across UK the price rise has been conservative, London market has run out of bounds, because of a ‘safe haven’ tag.

One could use the property websites rightmove.co.uk coupled with a ‘property bee’ toolbar on FireFox browser to inspect the history of property listings and how long they are on the market and what price reductions (if any) have been done. You could use the Land Registry website to check for recent sales in the same area.

Unfortunately no such database (as I know) exists in India - where huge number of properties are transacted in black money.

Hi Pavan,

Very important pointer and insightful- many thanks.

I must state that the management commentary factors all the positives and Challenges in London / Indiabulls Blu monetisation remain key moniterables. The mcap has also moved up considerably from a deep arbitrage situation and anyone seeking to take fresh position here should kindly build conviction and understand the risks associated with this investment.

Disc: Invested at 52 levels and have liquidated 50% holding this week. Both my posts are not a buy recommendation. All members kindly do your own due diligence.