Now that I have managed to irritate some of you, by rejecting stocks which you hold, let me push it still further J

Torrent cables: Erratic performance in the past. Loss in the current year and some years in the past.

TRF ltd: Negative cash flow. High accounts recievables being funded by supplier debt

Bharat bijlee: Poor cash flow. Rough estimate is 20% of net profit, hence the valuation is double the current PE. Fairly valued.

Allied digital services ltd: Raised new capital, majority of which has been used in accounts receivables

Ganesh housing: Fully valued or overvalued. Constantly raising capital for growth

Supreme industries: very low free cash flow and low margins.

UB engineering: Negative networth. Business turned around in the last 2-3 years.

Some quarterly results

Some of the companies, I hold currently have declared their quarterly results. A quick review and some thoughts

VST industries: The company reported a 40% increase in topline and 50% improvement in bottom line. Volume growth seems to be driving the top and bottom line in case of this company. I do not have access to the reasons behind it and hence it is difficult to evaluate the sustainability of the performance. I need to analyze if the growth is being driven by some new products as it is unlikely that the existing products would suddenly do so well.

Asian paints: The company is now firing on all cylinders. The company has reported a 100%+ growth in net profits. This has been a long term holding for me and as I have written in the past, I am also an ex-employee of the company. I am not surprised with the performance of the company. The company has a long history of good performance and has increased its market share and competitive advantage substantially in the last few years. The valuations of course reflect the strength of the company

NIIT tech: The company reported a 12% decline in topline and similar decline in the bottom line. The key reason behind it are the hedging losses. The company has been able to improve its operating margin during this period. There is nothing much to get excited in the current quarter results and with rupee appreciation, it is likely that the negative impact of the hedges will be reduced. I do not expect much in terms of the performance, which has clearly been a disappointment for me. I have marked down the intrinsic value of the company accordingly.

Maruti Suzuki: The company reported a 45% increase in topline and 90%+ improvement in net profits. The topline has been driven by domestic growth and major increase in exports. The bottom line has been driven by moderation of various commodity prices. The performance has been as expected in view the good monthly sales numbers and the stock price has already factored in this performance. As I have written earlier, I have started exiting this position.

I will be posting on the results of the other companies in the coming weeks as they are published and I am able to complete my review of the numbers.

The period from Oct 2008 – Mar 2008 was a no brainer period – as long you could suppress the sinking feeling of watching your holdings drop everyday. As I had gone through a similar phase (though longer, but equally mind numbing) in 2001-2003, I was better prepared emotionally to deal with it. I had promised myself in 2003, that I will ignore the doomsday predictions and invest a meaningful amount of money when and if the crash came.

As they say, be careful what you wish for. I got my wish in 2008 and more. So during this period it was a matter of picking a decent company and investing in it. The valuations did not matter much as almost everything was dirt cheap, as long as one could be sure that the company would survive the likely recession and prosper in the future. This period did not last too long and we have been on an upswing since April 2009.

The situation is now completely different. I have never seen a market where almost every company, especially mid-caps and microcaps are doing well too. During the previous bull market in 2007, there were pockets of undervaluation as the markets were focused on the hot sectors – realty and infrastructure at that time. So one could find undervalued IT or midcap companies easily.

Sudden corrections

That situation has now changed completely. The correction in undervaluation for several companies is startling. I have seen companies like Hawkins cooker, VST and countless more correctly suddenly by 40-50% or more in a matter of days. This is more pronounced in case of companies which have reported good results in the previous quarter.

The upside is that most of us are sitting on pretty decent gains for the year, far more than we expected at the beginning of the year. The downside is that the number of attractive opportunities are shrinking by the day.

Modified approach

I have been running filters and have done an initial analysis on some 200 odd companies and can hardly find anything which would send my pulse racing. There are a few decent opportunities out there and one could invest a moderate amount of capital in it, but nothing in which I could commit something meaningful and be confident about it. One option could be to do nothing and wait till something really attractive comes up. The other alternative, which I may end up following, is to buy the entire set of moderately attractive ideas in equal proportions. The end result would that each one of these ideas may not do well, but the group as a whole should give me above average returns.

I plan to publish a few of these ideas in the coming weeks, provided they do not run up in the meantime. However, as I promised in my previous post, the top 1-2 ideas are reserved for those who have already contributed or plan to do so in the near future.

An update on donations

I have received a commitment of around 15000 Rs (rupee equivalent) from around 13 readers. Needless to say, that I am very pleased with the results and would like to thank them (which I have already done personally).

A Happy Diwali

Finally a happy Diwali to all the Indian readers and may all of us have a prosperous year ahead.

I recently added an ad for CRY – Child rights and you, a non-profit organization which works as a channel or a link between donors like us and field workers, who work for child welfare. You can find more on their mission and activities on their website here.

I have added the link on the side bar under the title – Donate. I am also adding the link in this post in case you are interested in donating
http://www.cry.org/mainapp/shop/donation.aspx.

I will add a few more charities on my website in the future based on how convenient it is for the readers to donate and based on the effectiveness of these charities. My personal preference would be for charities which work for child welfare and are effective in doing it (do not waste the money on overheads).

I personally do not have any means of evaluating a charity and have picked CRY as I have worked with them in the past and have found them to be professional and focused on their mission.

Additional offer
I have not charged a dime from anyone for all the content (now over 400 posts) I have posted for the last five years. The ads you see on the website is the result of fiddling around and does not bring in any serious revenue.

The content on this website, good or bad, is original and not copied from anywhere. It typically takes me an hour or more to write some of the posts and the investment ideas are generally the result of the more than 20-30 hours of direct analysis and much more of background reading and study. It is my assumption that I have delivered some value (though you can disagree on it 🙂 ) to the readers over time, for which I have not charged and do not plan to charge in the future.

I plan to make an exception to the above plan in one specific case. In the future I plan to publish or provide a few investment ideas at regular intervals in exchange for donations to the charities listed on this blog. If you make a donation of a minimum of 1000 Rs or 30 dollars, and send me the receipt by email, I will in exchange email, a detailed analysis of a stock to you.

Whats in it for me?
That would be a very valid question from your end. For one, the offer is voluntary and as 97% of the content is free, you may not miss a lot. However you can look at it as a win-win offer too. If you donate, a child’s life would be changed and in exchange you may get a decent investment idea which may make some money for you . I cannot assure you that you will make money from my idea, but I can assure you that I will share an idea, only if I am investing in it.

I will be writing in detail on this in future posts with more options on this. Please leave me a comment or email if you can think of a good idea by which both the readers and the charity are benefitted.

Commerical advertising
You may be noticing some ads on my blog too. I have been experimenting with some ads lately to cover my hosting and other small expenses. I am personally not associated with any of the firms advertising on this blog and do not have a financial relationship with any of them, other than the click thru revenue or fixed fee for advertising on the blog.

I managed to achieve perfect timing this time. It managed to sell exactly before the fundamental performance of VST and India nippon turned around. I wrote the following post on the two companies and my key reason for exiting the two stocks was stagnation of their fundamental performance for the last 2-3 years.

VST reported a 126% increase in their net profit, driven by a 100% increase in topline. This increase is not really a one time increase as the other companies in the industry like Godfrey Philips have reported similar results driven by the topline growth. I have yet to investigate the sudden turnaround in the industry and whether it is sustainable.

Indian nippon reported a 100% growth in profits, driven by a 20% increase in topline. The reason for the profit growth in excess of the topline is due to the operating leverage enjoyed by the company. I need to analyze how sustainable is the performance for India nippon.

My confidence levels in terms of fundamental performance is still higher for VST than India nippon (irrespective of the stock price). The reason is that VST sells a consumer product with pricing strength, whereas India nippon is an auto component supplier which could be benefitting from the upturn in the auto business. The company however, does not enjoy as much pricing power and hence may not derive as much benefit from the upturn in business.

So where did I goof up?
The first thing i do when something turns out different from my expectations is to analyze if I could have analyzed it differently. My reason for the exit was stagnant fundamental performance (irrespective of the stock price).

At the time of the sale, after I had analyzed the two companies, I could not foresee a turnaround in the business. In case of VST an economic downturn will not hurt the businesses and hence when the economy turned, I did not expect the business to turn as much.

In case of India nippon, It can be argued that the auto industry is turning around and hence it just a matter of time that the auto component industry would benefit too. However, it was difficult to reach such a conclusion in case of India nippon as the company has performed poorly in the last 3 years when the auto industry was still doing well.

The other drawback with these companies is the lack of transparency on the part of the management. The Annual reports are very brief or cryptic and there are no management calls which an investor like me can read to get an idea of the likely direction of the business. A professional investor having access to the management would be able to avoid this problem.

The final point is how long should one hold onto a stock before the fundamental performance turns around. I typically hold a stock for 2-3 years and even longer if the fundamental performance is satisfactory. However if the fundamental performance is deteorating, I tend to exit the stock. As someone has said – Hope is not an investment strategy.

Indentifying turnaround in business performance is difficult for me and I tend to get the exact timing more wrong than right. Ofcourse this is not new for me – I have sold L&T in 2003 after holding it for 5 years, right before the company took off

It does not disturb me
The above occurrence does not disturb me. It does not mean that I am proud of missing such turnaround and will not analyze my thought process further to see how I can improve on it in the future.

I have said in the past that if I can get a 70% success rate in my picks, I will do fairly well. What is the logic of this number ..did I pull it out of my hat?. There is a logic to it. I typically invest in a stock with a 2:1 to 3:1 odds. What that means is that if the stock is priced at 100 / share, then the possible upside is between 70-80 and the possible loss is between 20-30. The expected gain (gain * probability of gain + loss* probability of loss) is around 35-40 ( .7*70+.3*30) or 30-40% which provides me a margin of safety too.

My actual success rate has been around 70-80% in the past with the gain/ loss ratio around the same level. As a result, I have been able to meet my return targets in the past. In addition, an additional lever in managing the performance is managing the allocation percentage to a specific idea. One should allocate a higher percentage to the ideas where one has higher confidence.

Follow me – in reverse
Considering my almost perfect record in selling (around 0%), I think it would make sense to hold or buy when I decide to sell :).

When I suggest, that you should do your own research and not buy based on my recommendation, I am dead serious about it. A 70% success rate has worked out well for me. The impact of the 30% failure has been further reduced as i have not allocated too much of my funds to those ideas as I did not have as much confidence in them. If you decide to have a higher allocation than me, your results could be worse.

An additional point: I tend to change my mind suddenly, if the current facts invalidate my expectations. So I may end up buying something which I recently sold or sell something which I bought and realized that my thesis is wrong.

I recently got asked – whats up rohit ? why no new ideas on the blog ? on a vacation ?

Short reply – not on vacation and still searching.

During the Oct – April 2009 period it was easy. One could throw darts and pick stock which were cheap. Ofcourse, what was needed was courage at that point. A lot of people wanted to wait till the fog of uncertainity cleared up. Well, the fog supposedly has cleared up and the valuations reflect that and more. We have moved from a 10 ft visibility in March 2009 to 100 Km visibility in a short span of 6 months !! amazing change in sentiment.

Not much value
I have been looking for new ideas, but most are not attractive enough or are fairly valued. I personally don’t do top down, sector based or any other mumbo jumbo type investing. I have a brute force method of looking for stocks – run various filters based on PE, debt equity and other factors manually on a list of stock. This would give me a list 5-10 stocks which I analyse in further details (read annual report) and come up with 2-3 stocks. In the end I may pull the trigger on 1-2 stocks. So it is all sweat and labor. For more details see here.

I am able to find 2-3 ideas a year and that works for me. I am quite amazed at some people who are able to post an idea a week.

In a minority
I have been talking to some friends and most are now planning to get into the market. Most of them feel left out and want to enter now and ride the upswing as much as they can.

I may be wrong here and we may at the cusp of major bull market where the index will go from 16K to 25K in the next 6 months, but this is a game I have not yet learnt. I would prefer to do nothing if I cannot find something smart to do.

In a nutshell, I am not finding too much value out there. Ofcourse my opinion is in the minority, where you have others recommending stock such as maruti suzuki when I am exiting this position.