New to this forum and relatively new to the investing world (I began actively investing around June-2021). Over the last 3.5 years, by reading books, annual reports, and multiple other public documents and material, I’ve been trying to sharpen my investment thesis. Posting it below for feedback and comments:
Goal: Which company to invest in and why?
Thesis:
Financial Robustness
• Debt = 0
• Interest Coverage > 10
• ROCE (EBIT/(NWC+NFA)) > 25%
• Revenue Growth CAGR over last 5 years > 15%
• PAT Growth CAGR over last 5 years > 15%
•Average OPM over last 5 years > 10%
•Cumulative FCF over last 7 years > 0
•Cumulative OCF over last 7 years > 0
•Inventory Days < 90
•Receivables Days < 90
•Cumulative PAT over last 7 years =~ Cumulative OCF over last 7 years
Business Metrics
• Is it a monopoly/Oligopoly/Duopoly?
• Market share in industry? Is it growing?
• Does the company have pricing power?
• Is pricing regulated by the government?
• Is the volume growing over time?
• A qualitative aspect of volume growth over time? New markets? New products? New customer segment? Change in product lineup?
• Does it have enough capacity to meet the increasing volume?
General Metrics
• Age of company in the public markets
• Management Quality
• Reputation among stakeholders (customers, suppliers, employees, shareholders, partners)
Industry Metrics
• TAM (Global, Local)
• Industry Growth Rate
• Convergence Pattern among players in Industry
• Customer Power/Fragmentation
• Supplier Power/Fragmentation
• Competition in Industry
• Threat of new entrants
Strategy Metrics
• Is it a turnaround situation?
• Is it an M&A Junkie?
• What is the company moat? What is its competitive advantage?
• How is it allocating capital?
• How much is annual Capex spend? As % of revenue?
• What is the growth strategy? What is the sustain strategy? Are both sustainable?
• Is it a volume play or a value play (Mass vs Luxury)?
Valuation Metrics
• Average PE Ratio over last 5 years < 30
• Current PE Ratio < 30
screener.in is one of the websites where you can build your own queries with technical parameters like ROCE, ROE, PAT etc. and get the list of companies satisfying that
Thanks Rajesh. For new businesses, I’m counting on the metric What is the growth strategy? That should cover growth via new products, new geographies, new product lineup, new target customer segment.
Regarding your point on Valuation, it is still something I’m evolving in my head. I know methods like DCF exist, and I used to use them in the past, but just couldn’t find enough accuracy to proceed with them. What my thinking regarding valuation is: Based on the thinking that ‘prices will always return to mean in the long run’, I compare the current PE to the historical PE
Why 30? Nifty history PE for last 10 years has been around 22, so 30 is just a comfort number based on that. I’m not too strict about it though. I have invested in Indian Hotels which trades at a 70+ PE and historically has always done so.
As Duvvury mentioned, Screener.in is a great website. Apart from that, there is company specific material such as Annual Reports, Conference Calls, Quarterly Presentations etc.
Most of the metrics what you have taken are based on historical performance. I would rather look at what sector is flying at the time of your investment and then start looking at these parameters on the companies who are operating in such sector. The sectoral preferences from time to time will keep changing and if you don’t take that into consideration, then your portfolio will give you an average returns. Hence suggest to keep track on the sectors which will grow in the next 3-5 years and then select the best stock in such sectors. This will boost the growth rate of your portfolio.
Thanks for the guidance @abkamath. When we are talking about hot sectors vs non-hot sectors, the question then comes how can we quantitively evaluate which sector is hot at which point of time? For example, can we say Banking is hot right now? What about Bitumen trading?
Also, doesn’t this imply that all stocks in the sector move along with the sector trends, with minimal variation of movement between intra-sector stocks?
This is something which needs to be digged into. For example in 2022 if you had followed the priority of the government or higher budgetary allocation, it was in Railways & Defense. So if you had bought some good stocks in these two sectors, you would have already made 300 to 500% return on your investment within 2 years of investment. According to me, both these sectors are still a good sector to invest. Similarly, in the last 1 year one of the growth sector is Data Centre and there are quite a few stocks which are doing well in this sector. If you had picked up some good stock in this sector say in the month of Jan this year, you are already doubled your investment. I would rather spend more time in assessing which sector has growth potential because of change in government’s policy, that will give you multi-bagger return as compared to just looking at financials.
