The stock picks you?

Stock Opportunities Special Situations
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As a long-term investor, we choose the sector and then study 3 to 4 top companies. we wanted to buy the best company. but the best company is overvalued. there are 3 to 4 companies in the sector which also means there is no moat in that sector.

Assume AMC sector. only 6% of of indian population submit tax. huge run way ahead for amc business. you might want to buy hdfcamc or nippon amc. but uti amc is at 15PE and at 5% dividend yield.

kindly share your experiences in picking another stock just because of the valuations. so basically the stock chooses you more than you chose the stock. whats your learnings on this ?

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I have not much experience with these situations, but I think experiences may differ here, as different arguments can be made.

If market is giving a low multiple, there must have been some reasons for that, so going for a low hanging fruit, so to speak, we are essentially taking a chance. This chance may very well turn out to be a success, if rerating happens. There have been such success stories like these here in VP.

Also, if it does not work, then we are stuck with a non-performing stock, which can still go down some more. We may lose patience, we may even revisit our thesis, may be even think we made a mistake and exit.

Perhaps, sometimes, when companies with stable sales, strong cash flows, dividends too, go down with the broader markets, so maybe then we can act then.

I have a position in Coal India, bought more than 2 years ago. I did not buy it for growth at the time, I bought it for the dividends, the price appreciation was unexpected. I bought after reading an article which explained about the business, and concluded why the market price at that time is a good price to buy. I bought and added to my position as it went up.

I was interested in buying Mirza a few years ago, purely from valuation perspective, compared with Bata or even Relaxo. I don’t remember all the details, I must have bought and sold quickly.

Even investors with deep understanding of the business may be proven as wrong sometimes, but then again, bargains also can be profitable.

So I think, each such case is different, and maybe a bit of luck is also involved.

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