October 22, 2009

Portfolio changes and some rejected ideas

I mentioned in my previous post on my change in approach. There are two key reasons, why I have made a change in my short term approach. The first reason is that most of the holdings in my portfolio have risen sharply and are now close to intrinsic value (which is true for almost every stock, so nothing surprising about it). As a result, I have the option of holding onto these companies and get a return commensurate with an increase in their fair value or replace these holdings with cheaper ones. The second reason is that there are not too many mouth watering ideas out there. There are a few decent opportunities, but nothing which would get me excited.

The net impact of above situation may result in the following approach for me, in terms of portfolio construction

  • Sell some of the current holdings as they approach fair value
  • Create new positions which are cheaper than the stocks i am exiting
  • Higher diversification due to lack to truly attractive ideas selling at a high discount to fair value

In view of the above thought process, I recently initiated some stock filtering and level 1 analysis on a list of around 200 odd companies. I have written earlier on my filtering process (see here).The level 1 filtering for me is fairly quick and involves a quick review of the profit & loss, Balance sheet and cash flow statements. I typically spend 5-10 minutes on a company and if it does not catch my eye, then I move on to the next company on the list.

Placer mining

A valid criticism would be that this process is too superficial and crude and I could miss out on a gem. That would be a valid criticism, but that is a downside I am ready to accept. I look at this stage as mining for gold by the river (I think it is called placer mining). This typically involves collecting dirt and passing it through a series of filters, which get finer after each pass. Now as you are processing tons of rock and dirt, one cannot be too careful at the initial stage. Almost 80-90% of the time, the company may not be worth analyzing further at the initial stage, till the list has been whittled down to a manageable number.

The careful and indepth analysis happens at the final stage when it is time to pull the trigger on a few (hopefully) decent companies.

Some rejected companies

Let me give some example. It is possible that you hold the company as you have done in depth research. If that is the case, feel free to post a comment on them and i would be perfectly willing to change my opinion.

Kinetic motor company: The company has been incurring increasing losses in the last 5 years and the networth has turned negative

Compact disc india: Company has shown high growth, decent fundamentals. However rejected due to possible corporate governance issues

Temptation foods: Sudden increase in debt and equity in 2009. Company is into commodity trading, which is fairly risky

Sandur manganese & iron : Erratic performance with losses in current and some of the past few years.

EID parry: Sugar business with high degree of cyclicality. Current profits are high and hence the valuation appears low.

Lakshmi energy and foods: Negative free cash flow. Into commodity business, too high working capital with profit going into expanding the balance sheet.

Krone communications: Not performing well. Net profits dropped from 5 crs to 1 crs in the current year.

UB engineering: Negative networth, with business turning around in the last few years

Turnaround cases

One consistent theme in the above list are the turnaround cases, which I tend to avoid. Investing is turnaround is a fairly specialized, high risk and high return form of investing. There is decent chance of losing money in such cases, but a few of them can work out pretty well. However, I personally avoid such companies as I do not feel comfortable with such cases.

24 comments:

kumar said...

Temptation foods is now into commodities trading? Where did you hear that?

Rathin Shah said...

most of these companies mcap must be low, i guess but now would have crossed 100+ cr.

I am really skeptical abt Temptation foods. This years annual report is full of pictures (mostly worthless-it seems like a porn mag). and don't know why are they spending so much for annual report. Also they seem to hold ~14% of Kohinoor Foods Ltd (basmati fame).

Relation to turnaround situations-WEB Quote-Turnarounds seldom turn

-Rathin

Shiv Kumar said...

Regarding turnabout cases you should look at Artson Engineering. Its a BIFR case company taken over by Tata Projects. After capital infusion and some amount of debt restructuring the company is showing good results for the past few quarters.

I am getting a lot of positive information from people in the know.

The problem is the stock has run up quite a bit.

Anonymous said...

Hi Rohit - I checked Compact Disc & Lakshmi Energy in past and rejected due to the reasons stated by you.

What do you think of Esab? I have no issue, except valuation.

Thanks

vignesh said...

hi rohit ,
As u pointed out about the corporate governance issue on Compact disc .I have a report about the same .If you want it I am very much happy to send it to ur email ID.

ravi said...

Hi Rohit,

I rejected some of the ideas you mentioned due to the same reason. I am curious if you analyzed Tata Sponge. Whats your view on that? How come it did not come in your radar.

Regards
Ravi

arunsg said...

Viewed from a purely financial perspective, Kinetic Motors is not investment grade at all.

However considering the fact that Mahindras now own the company and have aggressive plans of coming out with new two wheeler models, it might be worth the risk. Yes, turn-arounds do have high risk and sometimes to give out commensurate returns. See what happened to Satyam when Mahindras stepped in - it became a 10-bagger within a year!

Regarding Artson Engg, it might still be a speculative pick at the moment, but considering the potential for growth being in the infrastructure, it is worth a second look, even at these prices.

Yes, I have investments in both!

Knowing Rohit's style and very strict critieria though, both dont pass muster. But I look at it as the pepper and spice in your meal - its not the main course, but having it does add spice once in a while!

Rohit Chauhan said...

Hi kumar
i did not hear it. it is classfied as such in moneycontrol. classification could be wrong ..but the fundamentals did not catch my attention at first glance. do you think its a good company ?

rgds
rohit

Rohit Chauhan said...

Hi rathin
i havent seen the AR for temptation. first glance analysis did not catch my attention, so i have moved on
rgds
rohit

Rohit Chauhan said...

Hi shiv
that may so be the case,however as a principle i avoid turnaround, mainly as i am comfortables with the risks associated with it. that does not mean these are not good opportunities if you know what you are doing

rgds
rohit

Rohit Chauhan said...

Hi anon
agree with you on esab.it is good, though not very cheap

rgds
rohit

Rohit Chauhan said...

hi vignesh
you can email it me on rohitc99@indiatimes.com

thanks for it

rgds
rohit

Rohit Chauhan said...

Hi ravi
tata sponge is on my radar and has filtered through to the next step. the list on this post are a few rejected ideas as a sample.
tata sponge seems to be doing well and seems a bit cheap. i have yet to do detailed analysis on it

rgds
rohit

Rohit Chauhan said...

Hi arun
you are right. turnarounds are not worthwhile investments at the right price and can give spectacular returns if you are right. its just that i have never ventured into it ..especially as i prefer moderate return and moderate risk opportunities.

i may look into these in the future..but not yet. but yes, if you are right in these two companies, it can be very very profitable

rgds
rohit

arunsg said...

Hi Rohit -

Did Orient abrasives & Hyderabad Industries pass the filter- assuming you had them in the initial list?

Thanks
arun

Mansukh. M said...

I find GSFC, Tata Sponge real good investments and am personally holding them. I feel Microtech is also good and must hav caught ur eye.

kumar said...

Hello Rohit,

Temptation's numbers look very good but mangament's reputation is not! (management may be misunderstood for their aggressive acquisitions and rumored attempted takeover of Kohinoor Foods).

SEBI and IT were after them due to irregularities with their Kohinoor Foods share purchase. Now, they are exonerated of all charges.

I am interested (invested) since their stated book is about 95 (trading at 40), Sales/Mcap is 10:1, EPS of about 20 with brands 'Everfresh', 'KarenAnand'.

If you trust those numbers and management, then it is worth a serious look.

And if you come across more about their management - whether trustworthy, shareholder friendly, please let me know.

Kumar

Anonymous said...

Avoid MicroTech. It is one of the private treaty company of ToI group; so they write a lot about it.

Read the link to know more aboout Times Private Treaty & investments,

http://indiahousingbubble.blogspot.com/2009/06/story-of-bennett-coleman-co-toi-group.html

Kannan

Sachin8778 said...

Hey Rathin,

Thanks for your comment about the AR report; it made me browse it. Wow! If ARs are like this I better start reading them more often than I do curretnly :) Of course, this was the definitely different than others I have seen. I wonder TFL is in the wrong business, given the talent.

Rohit and fellow readers, you must read/see it :) Afterall you deserve some change from the boring numbers/analysis :) N'joy!

http://www.temptationfoods.com/reports/Temptation%20Foods%20Limited%20%2008-09.pdf

~Sachin

Anonymous said...

Lol, I liked Temptation Foods AR. Esp, double-chocolate Sundae was mouth-watering ;-) If anyone could ACTUALLY analyze the data amidst the 'roller-coster-ride', well, you would be the next Warren Buffett.
What the hell are they trying to do with their AR?
- Prashanth, BLR

Rohit Chauhan said...

Hi arun
yes orient abrasives and hyd industries has passed the filter. i however need to do further analysis

rgds
rohit

Rohit Chauhan said...

Hi mansukh
mico tech has passed the initial filters, but i need to analyse further, but as kannan says, if there are management issues, i may give it a pass

rgds
rohit

Rohit Chauhan said...

Hi kumar
the numbers did not pass the initial filters for me. as a result i am not looking closely at it now

sachin/ prashanth - you guys seem to be getting entertained by the AR :) ..that is generally not a good sign for an investor ..anyway i have not read the AR and hence cannot comment

regards
rohit

arunsg said...

Hi rohit,
What happened to Orient Abrasives and Hyderabad industries? You mention it passed your first filter...any conclusion? Also, did you consider Graphite India?

Thanks,
Arun