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The value of a buy list

By Rohit Chauhan
In Uncategorized
March 18, 2012
5 Min read
28 comments
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update 23/03

I have rarely received as  many comments and complaints about the customer service and the overall business model of a company as mahindra holidays.
 
I picked two companies randomly from my list to illustrate the investment process of maintaining a list. The purpose of the list is to track stocks after they pass an initial filter and dig deeper when the price is right.

The first pass analysis in case of Mahindra holidays, clearly failed in my case and has highlighted (to me) the danger of superficial analysis. I am glad that i learnt an inexpensive lesson and any damage was mainly to my pride and not to my wallet.

If you were thinking of purchasing any of these stocks based on this post, i hope it has highlighted the risk of buying something based on someone else’s analysis.

Thanks all for your comments !
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I am usually looking for new ideas on a regular basis. It is not difficult to find a good company, but the challenge is in getting a good price. High quality companies with competitive advantage and good management usually sell at or above fair value, unless these is an industry specific issue or a macro scare which causes the price to drop below the fair value.

As one cannot know in advance (at least I cannot) when the market will throw up bargains, I tend to analyze a company and then park it in my buy list. I use this list to track the price to fair value and to evaluate the fundamentals of the company on a regular basis.
Let me give two examples to illustrate how I track these companies. The notes below are my rough notes and thoughts.
Mahindra holidays
Intrinsic value : 410
Company description: The Company is the no.1 vacation service company with 70% market share. Company has 125K time share customers. In addition company also has travel and is now catering to corporate customers too.
Reason for buying:
1. Company has an ROE in excess of 25%, 0 debt and net margins of 20%+
2.Company has grown topline at 30%+ and profit @ 50%+. Likely to grow at 20%+ levels in future
3. Company has been in biz for 15 yrs, has a well know brand, extensive distribution/ sales network and also 35+ properties
4. Company is adding new properties and adding new products too.
5. Good growth is likely as domestic tourism is growing rapidly and company has captured only a small piece
Reasons for not buying:
1. Valuations are high @ 20 times earnings
2. Company slowed down in 2011 to improve process and business (need to dig into it). Also customer churn not clear – could be high (10%?)
Current thoughts (as of 4th Jan)
Not creating a position mainly due to valuations
Suprajit engineering
Company description : The company is the no. 1 mfg of automotive and non- automotive cables. It has the highest market share in the domestic market.
Reason for buying
1. The company has maintained an ROE above 20% for the least 10+ years.
2. The company has compounded topline and bottom-line by 20% in the last 10 years (although the growth has been in spurts)
3. Company is sole supplier to companies such as Hero Honda, Bajaj and also supplies to companies such as maruti suzuki, GM, BMW and other global companies
4. Competitive advantage from scale, good customer relationship and smart management.
Reason for not buying
Company has had periods of low and high growth. Auto business is slowing down and we could see slowdown in growth and margins in the next few quarters. Should evaluate in the next 2-3 months
Current thoughts (of 17-June)
Check Q2 results and then take decision. Risk is the company would continue to do well and the price may run away (less likely as auto smaller auto companies do not get high valuations).This is unlikely to be a PE re-rating idea and more a EPS expansion idea
Why do this ?
I started maintaining this list in the last 2-3 years.  There are multiple reasons for it.
The first reason is that I don’t have a very good memory and cannot remember the analysis of a company after some time. I could always delude myself, but think that accepting my limitations is a much better alternative. Once I have analyzed a company, I keep rough notes in this buy list and can refer to it regularly. This helps me in tracking multiple companies and allows me to benefit from my past work.
The second reason for keeping these notes is that the price may not be right at the time of analyzing the company. As a result, if I keep a note of the company, I am able to act quickly when the price drops below my target range. A lot of times such a window opens up for a short period  and it makes sense to act quickly at that time. For ex: financials and banks in Dec 2011. It is difficult for me to analyze a company in depth in a short period of time and all the work done in the past is very useful at such times.
The final reason is that this list is a repository which  will keep building with time as I analyze more and more companies. This should help me in tracking companies and acting on them quickly at the right time. It’s like my personal gold mine 🙂

Stocks discussed in this post are for educational purpose only and not recommendation to buy or sell. Please read disclaimer towards the end of blog

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The Dilemma

By Rohit Chauhan
In Investing Philosophy, Uncategorized
March 3, 2012
4 Min read
24 comments
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I have several dilemmas in life – such as should I eat jalebis and other good stuff or go to the gym? Sleep late or go to office? But as these dilemmas are of no concern to others, I will leave them for my own thoughts
The investing related dilemma I have always faced and more so during a market crash is this – Should I invest in the high quality companies whose price has dropped a bit or the low quality cyclicals where the price has collapsed completely. I have tried both and will try to present how my thinking has changed and where it stands today.
Let’s look at two specific examples – one of a high quality and other an average company. The high quality company is one of my long term holdings – CRISIL and the other company is Denso India, which I have long exited.
The chart below is of crisil
I wrote about  this company earlier in 2009 and have held the stock since then. As you can see the company and the stock has not disappointed and have done far better than what I expected at that time.
I have had an eye on crisil for quite some time and finally took the plunge in 2009. It is easy see that the company has an enormous competitive advantage due to government mandated status of a certified credit rating agency and brand. In addition the company requires minimal capital to grow (mainly office space and some computers). The company is thus like a toll bridge which does not require any capital expense.
The second example is of denso India. I wrote about the company here. The company was a cash bargain (stock price below cash on hand).
This is the chart for denso India
I was able to buy at an average price of around 40 and exited at around 85-90 bucks. In hindsight, it turned out to be good operation. However as you can see from the chart, the stock has been sliding since then as the performance of the company went south in 2011.
Where’s the dilemma?
Some of you may be thinking – what is the dilemma here? You made money in both, so both options are great. Case closed.
I don’t think that one should reach that conclusion here. In the case of crisil, the company has been able to increase its intrinsic value at a good pace and the stock price has followed suit. I had to make a one time decision to buy the stock and since then have just sat on that decision.
The case of Denso india is more complicated. The company appeared to be a complete bargain in 2009 and in comparison to crisil was much cheaper. At the same time, the company did not have much of competitive advantage. The trick was to buy the company when it was dirt cheap and get off the bandwagon when it was merely cheap.
This is a more complicated operation than it appears on the surface. One had to time the buy pretty well. If you had bought too early, say in mid 2008, the eventual gains would have been around 30-40%. In addition the sell decision also had to be timed correctly. If you sold in 2011, the gains would have been paltry. I  was unusually lucky in this case.
Thus in the short term,  gains are much higher in Denso type stocks. However one has to make more decisions and then also find a new idea to re-invest the capital. In the case of companies such as Crisil, once you have made a buy decision, you can just wait and watch the magic of compounding take effect
So what is a good option?
If you have tendency to constantly ‘do’ something and want some action, then denso type stocks are a good option. If however, you can live with a few percentage point lower returns with the benefit of much lower effort and headache, then Crisil type of stocks should be your target.
In my case, I do have this tendency to constantly do something. As a result, I am always looking for the next new and shiny stock for my personal portfolio to get that extra return. At the same time I manage my family’s portfolio too. In that portfolio,  I have made the decision to buy high quality , fairly priced stocks and let them compound. The returns could be a bit less, but the risk is much lower and the heartburn almost non-existent.
Following is my partial list of high quality ‘wish list’ stocks
HDFC bank, Titan industries, ITC, Marico, Hero motorcorp, HDFC limited and nestle india.
Time  for some jalebis now . Gym can wait J
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My personal ten commandments

By Rohit Chauhan
In Uncategorized
February 18, 2012
1 Min read
23 comments
M
I have a few thumb rules in investing which have helped me a lot of over time. These are not some universal  ten commandments but they have kept me out of trouble, especially the tenth one !
Thou shall not buy a stock on a broker or a TV channel’s advice
Thou shall not trade
Thou shall avoid predicting or investing based on short term forecasts or outlook
Thou shall not chase momentum stocks
Thou shall not invest in an IPO.
Thou shall not use leverage
Thou shall learn to live within means so as to have investible funds
Thou shall not buy gold, commodities or any kind of fancy and complicated instruments
Thou shall not chase returns – if it is too good to be true, it is a trap
Thou shall say ‘Yes Dear’ when asked by wife if she looks good in a dress  – most important rule to have  a happy married life J .
You can choose to ignore the first nine rules based on your personal style of investing, but if you ignore the tenth rule – do so at your own peril !!!
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Raising portfolio quality

By Rohit Chauhan
In Investment process, Uncategorized
February 9, 2012
4 Min read
10 comments
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A bear market is a time for lots of activity for me. A 25%+ drop in 2011, with a near collapse towards the end of the year, threw up a lot of opportunities. During such times, the problem for me is that my portfolio soon starts resembling a zoo – it has a stock of each variety.
How do I end up in such a place?
I personally ignore short term forecasts and start buying a company (usually too soon) if the valuations are attractive and the long term prospects are good. The problem with this approach is that there is no grand strategy behind it. As a result I often end up with too many stocks in my portfolio
I have gone through such a phase several times in the past (in 2005, 2008 etc) and have had to prune my portfolio after that. This time around, I made a decision to limit myself to around 22-25 stocks and any further addition would require me to sell something – keeping the total number the same.
Now, one may argue that even 20-22 stocks are too many and one should have a more focused portfolio. Let me assure you that once I gain more experience and hopefully some wisdom, I will scale back the number to 15 or less. Till then this level of diversification is an insurance against my ignorance or stupidity.
So why limit yourself?
A different way of looking at this issue is to question the need to limit oneself to any fixed number of stocks. If you can find enough good and cheap stocks, why not load up on all of them?
I have followed this approach to a small extent in the past and have realized that this results in mental laziness. Once I buy a stock, the endowment effect kicks in and then I am reluctant to change my opinion on the stock even if the company is performing below average.
In all such cases, I have finally come to senses and have sold the stock usually at a small loss. The real loss however is the opportunity cost of deploying this capital in some other high quality idea.
What is the difficulty in exiting?
It would seem very easy to exit such stocks on a purely rational basis.  You look at the original thesis of the purchase (for example – the company will grow at X %) and compare it with what has happened since your purchase. If the company is performing below expectations and will continue to do so, then you sell the stock and move the capital to a better idea.
If only life was this easy ……
The emotional part
I find the emotional part of selling a stock, which has not done well to be a painful exercise. For starters, one has to admit that one has been wrong or unlucky (usually wrong) and in hindsight should not have bought the stock.
The next problem is to find another idea to replace the one being sold, which in turn will hopefully not be dud.
The worst of both worlds is to see the old stock soar in value after the sale (yes, I have had this one too – VST industries) while the new pick stagnates.
Selling to raise the quality
There are times when if you are fully invested, the only way to invest in a new idea is to sell an existing one. I have created an artificial constraint by limiting myself to 20-25 stocks. This constraint has now forced me to rank my stocks in an order and to look for the weakest ideas in the portfolio.  How do you do the ranking? Well that’s another post, and stock price is not the only criteria.
The weakest idea now gets compared to the new idea and if the new idea is much better, then it replaces the weaker one. You can call it the survival of the fittest – each stock has to earn its position and cannot just stay put in the portfolio. There are no holy cows!!
So which of my ideas are facing the axe? Some minor ones have already been axed. I have been reviewing the Q3 results and have a few more on the chopping block now (this one is a good candidate)
Selling the mediocre ideas to buy a more attractive stock is always painful for me, but over time I have found that my overall performance has benefitted by swallowing my pride and biting the bullet.

Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please read disclaimer at the bottom of blog.

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