I have been a trader for the most part of my life. I am planning to invest a portion of my capital. Holding investments for a long time has been very difficult for me. I hope to make it right this time, given decade-low valuations in small and mid-caps. I am willing to take considerable risk in my investments.
My assumptions are the following around the macro scenario:
India, like all EMs, is going to take longer to come out of the credit crisis and corona epidemic. NPAs in the banking sector could be catastrophic
The government has to eventually print money, like in developed countries. However, it is going to be challenging for INR.
Companies with near term cash flow visibility and dominant market share would be the winners in the years to come.
Given all these assumptions, I am looking to make a concentrated portfolio in 4-5 names. I have started with a 12% allocation in ITC, the rest of the portfolio is in cash/trading.
The rationale for ITC: Attractive valuations; market underpricing FMCG potential; strong margin trends in FMCG in the last 3 years; Stable cash flows; a huge opportunity for the dominant player in traditional business: India at the bottom of the per capita tobacco consumption
I am looking to utilize my capital in the coming weeks/months.
Would appreciate suggestions from the forum members. My criteria are:
a. No lending institution, I don’t think we have seen the end of the NPA cycle
b. Near term increasing cash flows
c. Scalable opportunity
d. Trust-worthy promoters/management
ITC is the one of the most prominent business model in the Indian stock market there is no doubt on it.
But only concern is why the market is pulling it so down ,there is something that we cannot see and the market is judging it…
It could be the revenue loss that occurred during lockdown period or the least priority given to the tobaco products when the market will open.
May be there is something Market knows which I don’t know. Still, I am holding my neck out, and taking this risk. Market didn’t reward Reliance for 10 years until 2016. Reliance Jio was valued at zero in 2016 and retail also at a meagre valuation. Same may be true for ITC regarding its FMCG business; and tobacco business in always a cash cow.
See here it comes to what you think will happen and what actually will happen. If it was already what we think actually happens there was not problem at all.
Even I think , there may be pain going forward for financials / NBFC and I am not sure about how much pain it will have as well. But then just considering that I cannot postpone my full investment, right?
I mean , considering the discount you are getting on lot of financial names for e.g. HDFC Bank, ICiCI, Axis Bank and NBFCs for e.g. JM Financial or Edelweiss or Bajaj for say, I believe it’s not bad to get atleast a tracking portion and average it on considerable downsides.
I believe the investment in particular stock should always be divided into 5 parts
1-2-3-4-5 which will add to 15
It will help you invest the amount in staggered manner with 5 as a investment amount at price of what you think is maximum downside. But you can always start putting 1/15th and then averaging at downside.
Please note , this is only for companies you trust that won’t fall ever and eventually comeback. I won’t suggest this for a small cap midcap firm.
I still think most of these names including HDFC Bank, ICICI, Bajaj Fin are expensive despite a sharp fall. I will probably start a position in them after some months, whatever the price.
Lower-rug names like Edelweiss, I really don’t know how distressed their lending portfolio is. So I would avoid it for now.
I am willing to let a huge opportunity go if I am not comfortable. Market may behave completely different from what I am thinking and that’s fine for me.
Good start, thought and view shared. I am little curious to know that what are the factors you evaluated based on which you are concluding that HDFC Bank, ICICI, Bajaj Fin are expensive.
a) It also indicates that you valued these companies and in your hindsight have some price range or definitive price in mind above which is expensive and below which is attractive.
b) accordingly could you elaborate your thought process which can tell that based on your valuation method it is say x% or y% expensive at present.
IMO, if anyone is able to value a business correctly then game is 50% won. Remaining 50% is about allocation that matters. Someone is suggesting about 1-2-3-4-5 method of investing. I may be wrong but I view that such type of approach is amateur and ignorant way of putting money without realizing the perils of de-compunding!
If you have asked me to have position in HDFC bank, ICICI bank and Bajfin at these prices, if thew was no impending credit crisis in India, i would have jumped for them. Impending risk of higher NPAs in all these bank books is a high probability event. Valuing even quality banks at P/B> 1.5 doesn’t make sense to me. NPAs may be as high as 5-10% of the books for all of them in coming 6 months, with no fault of the management.
I don’t think financial sector will get pre-crisis valuation even if things normalise. Thw npa cycle has elongated due to corona. Earlier we recognise it, better it is. Credit supply would be limited, given higher npas in the system. Most of the banks would focus on their existing books, rather than growth. My thinking process.
Secondly, I also don’t like 1-2-3-4-5 process. It implied one always has lot of cash.Even if u follow that process, the current prices are at your last level, if u started investing, say, 1 year back. Most of the stocks are below their 5 year average. In terms of price, it won’t get better than this.
Thirdly, i am looking for a very concentrated portfolio; stocks, i am very convinced about and take a 20-25% size bet on them. Against principle of diversification, but if i need to diversify, i will rather buy a mutual fund.
Need some ideas to identify these high convictions.
Hi Paresh, it depends what % of fall is your trigger point for buy. Because 2% fall will be different from 5%, 10%, 20%,30% etc. fall. If you have tested your strategy in all market conditions for the above group of mentioned stocks and got consistent results then please continue. I haven’t evaluated it for all kind of stocks and all market conditions. I just view that if I am unable to calculate intrinsic value of a business and then buying based on price fluctuation alone in order to profit in future is a more often kind of speculation rather than value investing. But all is fine as long as we are getting results. Do post your results of your strategy in your portfolio thread. Most of us will learn if your strategy is yielding consistent results.
I think right now is the time to survive and so be in cash and gold. Markets are not reflecting the reality. Bottoming out is a process and will take at least 12-18 months. When there is severe lack of interests in stocks in the media and forums like this, when stocks don’t fall much even when there is bad news then we would have reached closer to the bottom and then is the time to buy. I have been unloading my PF built in the last ten years even though it was comprised of good FMCG and pharma companies. With no great stimulus from the Government and only policy announcements few of them were already announced in the prior years, and no implementation on the ground – things are not looking good in terms of economic recovery. You have rightly pointed out the issues which banks and NBFCs especially HFCs will face going forward. RBI can help them defer NPA recognition but one day they have to account for it. If someone really wants to invest then rural focussed stocks should be bought.
Last week, I added 2 more stocks with very small allocations.
Vodafone Idea : I am betting on survival of the company given ARPU increase across board. Won’t add on dips. Uncomfortable with the position, given so many uncertainty in near future.
Cupid India : I like cash flow certainty, good management and low valuations. I don’t see great scale for the company. Won’t add on strength. May add on dips.
Finding very difficult to add exposure despite such low valuations. Financials are at decade low valuations. I am confident that this is the sector which will give 100 bagger opportunities in next 10 years. But very difficult to make a conviction of which of the beaten down stocks will survive.
Still looking at stocks where I can attribute 20% of my portfolio.
I have added a few consumer names to my portfolio.Current portfolio :
ITC : 12% >> A long term compounder under pressure
EMAMI Ltd: 2.5% >> A long term compounder under pressure
Vodafone Idea : 2% >> Betting on survival of company given increased ARPU
Bajaj Consumer : 1.25% >> Products with prominent brand, available at 8-10x PE
Cupid India : 1.25% >> Cash on books, available at attractive valuation
Varroc Engineering: 1.25% >> Promising to be multi bagger when and if the cycle turns
I am mostly done with my FMCG allocation. Looking to deploy cash across pharma/financials/consumer discretionary and utilities.
Pharma: Jubilant Life, Sunpharma, IOLCP, Lupin
Discretionary: Eicher Motors, Motherson Sumi, Voltas, Page Industries, Indian Hotels
Financials: HDFC Bank, HDFC, Federal Bank, Repco Home, AU Small finance bank
Utilities : IGL, Gujarat Gas, Adani Gas
A sudden surge in markets has let me miss opportunities. However, I intend to increase my portfolio to 40% by the end of September.
Any suggestion on great companies with high quality management would be highly appreciated. It’s being difficult for me to get convinced about and track the stories of the companies. I am getting inclined to either invest in a mutual fund with good fund manager or develop a systematic portfolio based on momentum, quality and growth factors.