Most folks are interested in the Reccos - not so much the broad rationale. They reckon anyways the individual merits/de-merits are analysed at great detail in the individual threads. So why complicate things with additional columns?
And there are some young learners/enthusiastic folks who have written-in asking us to exemplify the use of the additional columns - 1 yr fwd PE, Fair PE band, and Future Potential PE band - why are they needde/why do we think these are useful to mull upon while making investment choices/ capital allocations.
So let me have a go from my side - how and why I find it useful to think in this way. These are (in the end) pretty simple things - but getting that consciously embedded in investment decision- making is a different thing, I found.
This may be boring stuff for enlightened investors - so kindly bear with me for the sake of our fellow-learners.
| Item | Practical use/Application | Examples from our ValuePickr Portfolio Experience |
|---|---|---|
| 1Yr Forward PE (On Recco Date) |
Apart from a forward view on the business, this is the only sure-fire way to get rid of price-anchoring. (Eternally thankful to Ayush for planting this firmly in my head - in early 2009/10) |
When I first looked at Mayur it was available ~6x at pre-split 240, think in Feb '11. We visited Mayur and came back highly impressed. Good results came and stock had climbed to 360-400 by July/Aug I think. Towards year end it was back to 300-320 levels...our calculations showed 5-6x 1 year forward and we loaded up again. Few months down the line at 400-440 levels again we found 6-7x 1 yr fwd and again loaded up - by the 3rd time we bought I think the fab dividends had started. For the first-time I was rid of price-anchoring for good. (Of course it helped that I was in love with the business). I found when we have done detailed homework to our satisfaction, and were generally comfortable with Management-speak and walk-the-talk, and could project with a degree of certainty (+/-10% tolerance), I could apply it successfully to other businesses. My entry price ceased to matter! |
| Fair PE Band | Apart from a broad perspective on available Margin of Safety, this helps us SLOT business in different Quality Bands. I finally started falling "out-of love" with my stock picks (Aim is to become as unemotional as Hit-bhai; he is the Man!!:)) |
When we started we had a Mayur and say an Ajanta at the same level 6-7x. Where was my allocation highest? - Obviously Mayur - I was a textbook/theory cat:) ROCE of 50+% vs ROCE vs Ajanta's touching 20%, both at similar growth levels. Huh! NO-Brainer decision for me. By the time ValuePickr Scorecard 2 came out in April 2012, I could clearly see a Pharma business being valued differently by Mr Market (Mayur 93% returns, Ajanta 216% returns)! I had already written down the Capital Allocation thread by then (got lot of theoretical appreciation for it - but clearly couldn't apply it to the more valuable stock in my PF :(. Finally by the time ValuePickr Scorecard 3 came out in Dec 2012, I think we started GETTING IT. The first discussion on Category A and A+ Businesses happened. And we exited a few because we found they are Category B or B+ businesses (with cyclicality, more variables, etc.) A simple enough "Fair PE band" application - but to GET IT somewhat, I took complete 2 active years in the Market. |
| Future Potential PE band | This is what I think should help us distinguish in our minds - which are the A+ Category businesses. Identify businesses with building blocks laid for dis-proportionate future returns |
This is still in the works:). Lot of thinking-through and refinements needed. We have seen some Pharma businesses get re-rated as they gained scale (easy to comprehend in hindsight:)). But are these higher ratings durable? In the short-term (last 2 months) Mr Market has voted Astral as A++ Category:). Who are we to argue? Will that be durable? In my mind I am clear PI has disproportionate growth characteristics, and so is Kaveri. We intend to get wiser by drawing in more and more experienced folks into this exciting process of refinement as investors. Some we will learn by our experience - like I did for Ajanta on the 2nd take. But some I am hopeful we can learn vicariously through others-more experienced and our own process and quest at becoming better-informed and thinking investors. |
| Future Potential | 25%+ CAGR | For the amount of homework/legwork that we do, we do not find it worthwhile to retain/include any business that cannot do 25% CAGR for next 2-3 years. THAT''s ALWAYS a GIVEN! (So the 18-20x or 20-25x is not a typo error, not CAGR, but Future Potential PE bands) |
I hope young learners will be as energised by the above, as I am. We want to enlist more and more folks into this kind of thinking - for our own selfish quest - for our Community - one day most discussions at ValuePickr may begin by attempting to slot the business first into A or B category or the rare A++.
Will this be useful? Time will tell - Maybe ValuePickr Scorecard 7 will enlighten us either way :)
Till then!
Fair P/E band is for the market and potential P/E band is for the well informed investor who is currently a small minority in the market.