For the last few months, I’ve been going through various and several VP stock threads learning and grasping as much as I can. This specific series of threads (Capital allocation framework, ART of valuation and Type A+ businesses) have been very informative and useful for me.
The recent crash provides us a great opportunity to consider finding great type A+ (I think original type C have been renamed as A+) businesses since the valuations would allow much better entry levels now (after a few months of Nifty correction and 2+ years of midcap/smallcap correction). Also, such adverse conditions provide a great opportunity for us to judge many of the qualities required for Type A+ businesses and managements.
To kick off this thread again, I would add an interesting pattern I have seen in several companies with longevity of compounding of fundamentals (and hence stock price):
There are several type of companies which are able to provide a longevity of fundamentals compounding (a few among them have outsized returns: for every dollar invested many dollars come out as profits). It appears to be that there is certainly a class (or subset) of businesses among the Type A+ which fit the following Description:
Description: Company has proprietary/complex/difficult-to-copy manufacturing processes for creating a product which has a stable and growing market. Either the provider of the technical know-how or the client (the two could be the same) has entered into long-term agreements (5+ years) enabling the company to have a long runway of fundamentals growth.
Companies which fit the bill:
- PI Industries: Company enters into long-term CSM contracts with global innovators and utilizes those to provide a clear growth of the fundamentals. The Long-term nature of the contracts ensures the disproportionate output from 1$ of invested capital. The trust built between the company and its partners (eg Sony) enable the long-term contracts.
- Divi’s Laboratories: One of the earliest post describes it as “The King of CRAMS(Contract Research and Manufactring Services) in pharma industry.”. From the beginning Divi’s for example had partnership with 20 out of top 25 pharma companies of the world.
-
Motherson Sumi*:
MS is run by a maverick owner operator who makes great deals with American and German car makers, asking them to pay him to take-over loss making OEMs all around the world and turing these OEMs around. In Mohnish’s own words, this is a very unique kind of moat, and CEO Chaand is able to reliably project earnings for years because of the nature of his long-term contracts with BMW, Ford etc. - RACL Geartech~: A small and upcoming drivetrain manufacturer entering into long-term contracts with A* world-class companies like BMW Motorrad, Kubota, Piaggio etc. The company has built their relationship with their clients the hard way, over years and slowly scaling up the supply chain.
- Transpek~: The Company sets up its contracts in such a way that it can easily pass on RM increases to clientele. The Company has long-term contracts with the MNC DuPont providing them the specialty chemicals it manufactures. Global cos are exploring opportunities for long term partnerships with Transpek as well.
IMO (in my opinion) the first 3 stocks growth have played out to a large extent already but the last two are yet to play out. I also hope I have managed to convince the reader the the present of a long-term contract with globally recognized cos and the ensuing trust are a part of s strong moat. Whether the growth plays out in the long-term is a function of the management’s ability to execute as well as whether the industry (specially downstream industries) remain growth stories or not.
Inviting fellow ValuePickrs to comment on my understanding, and if possible add the Type A+ stocks they are tracking/invested in currently.
*Gentle note that I have not yet read the ValuePickr thread for Motherson Sumi. Most of my knowledge is based on browsing screener and also Mohnish Pabrai’s lecture in Peking University. Despite the disastrous slowdown in the Auto-industry, motherson sumi has been able to hold its own in terms of earnings which have remained largely flat in last 2 years.
~These two companies are part of around 100 companies, some of which i went through quickly as a part of a screener I have set up for small cos which are turning around.
Disclaimer: No positions in 1st 3 stocks, small positions in last 2, looking to build more conviction as the downturn goes on.
PS: Admins, if you would prefer that I start a new thread with this post, I would be happy to do that as well.