March 25, 2010

The curious case of runaway stocks

I am getting frustrated these days.

I had filtered 2-3 stocks and was fairly comfortable with the business and the valuations. So after doing my slow and steady analysis (I have do my detailed analysis!!), I was ready to pull the trigger. On checking the stock price I realized that the stock had jumped 15-20% and had literally run away from me.


Multiple cases
Now, if this happened once or twice I would be fine. However there seem to be too many value investors out there now :). For some reason, a lot of undervaluation is getting corrected across a wide variety of stocks. There have been phases in the market such as in 2007-2008, when real estate or some other sector was hot and people like me could find nice and cheap stocks in the
mid-cap, IT or pharma space. No such luxuries now !

Some examples
Well, I am not going to let the analysis go waste. So let me list the stocks I came close to buying and then missed. These stocks are in my list and I could buy some in the future if the price is right and the fundamentals still good, but for now its wait and watch

Hawkins cooker – This is one of the first runaway stocks for me. The company is in a duopoly kind of a market for branded cookers. It is also into cookware products. It is fundamentally a strong company, with high ROE, decent growth and a strong balance sheet. The Company has decent competitive advantage via brands, extensive distribution network in its niche and has improved its performance too in the last few years.

I was asked about this stock by prabhakar kudva and found it to be a sound stock. The stock was selling at around 20-30% discount to its fair value then (my estimates) and as result I did not create a postion. The stock has since then gone up by 50%. I do not regret ‘not’ buying this stock as much as it was not cheap enough for me. Ofcourse the counter point can be that my estimates were too conservative.

Mangalam cement – I analysed the company here and placed an order at around 130 levels. I don’t recall the exact price, but my order did not get filled due to a 2-3 re difference. It now gets interesting! I got anchored to this price of 130 and wanted to buy the stock at a discount of 40% to my estimate of fair value.
The market had other plans and the stock suddenly jumped by 8-9% and it now trades in the 160-170 range which is not a price at which I would create a position in this stock

Amrutanjan – The company is a 100 yr FMCG company in the business of headache balms, cold rubs etc. The company has a strong balance sheet, with almost 70 crs of cash and investmentd. The company has an ROE on invested capital of around - 30%+ and competitive advantage from the brands and distribution network .

The company recently sold off some excess property and has been using the cash to do a buyback and also gave a special dividend. Overall the company has good fundamentals, strong competitive advantage and the management is allocating capital well. Finally the company was available at a PE of 8 (excluding cash) a month back. This was decent stock to buy, but I missed the boat on this one too.

So whats the point ?
Is it a case of sour grapes or a case of wanting cry in public for missing such nice opportunities to make money :) ?


I do my weeping in private :). The point is this – This risk is not missing these stocks. I am likely to miss such ideas during bull markets as the window of undervaluation closes quickly. The bigger risk is a change in my thought process.

I find myself getting impatient now, once I find a half attractive idea. In past when there was no risk of such stocks running away from me, I would analyse the company in detail and take weeks on end before making a decision. Now due to the above risk, I have done superficial analysis in some cases and later found that I missed some risks in the company. I have been lucky till date that I have not shot myself in the foot due to my impatience, but will have to be more careful in the future.

It is better to commit an error of omission than an error of commission (miss on a good stock than buy a lousy one).

24 comments:

Lucky said...

Peena Pilaan Ain Gunaah Hai
Dil Ka Lagaana Ain Hawis
Aapki Baatein Sab Sachchi Hain
Lekin Bhari Bahaar Ke Beech???
-Ibne Insha

In times like these, it is easy to get carried away. One is really hard pressed for ideas half as good as those available just a year ago.

But I think it is good to make a few (small) mistakes of commission. They always come back as good education. What say?

mash said...

What a wonderful write up.I have incurred big losses in recent times by both, Acts of Omission as well as Acts of Commissions.Presently taking a break to read up more and sharpen my weapons before i go to the field.
Could u guide as to where i can read more about your method of analysis.
Regards and keep it up.

Aniruddha said...

Hi Rohit,
I had asked you about Hawkins a month back..
================
Hawkins
- Last 3 qtr EPS is 54, Expected NPAT FY10 35 Crores, i.e EPS 66
- 5 Years AVG Dividend Payout ratio is 60%
- That means 21 Crore payout in FY10
- With 53 lacs Outstanding shares, Dividend can be Rs.40/share making yield of 5.71% on CMP 700.
- Current PE is 20, This has been moving in higher range of 15-20 since recently..
- With conventional PE of 10, CMP 700 is little bit overvalued. But Optimistic PE of 15,EPS 66, CMP is discounted by 40%.
- with EPS 66, PE 15, Hawkins price can be seen at Rs.900 within 6 months.
Hyderabad Ind.
- CMP 600, PE 10.20, 5 years avg dividend payout is 20% to NPAT.
- Last 3 qtr EPS is 85 hence FY10 EPS is expected at Rs.110, that makes CMP 600 at PE of 5.45
- @20% dividend payout ratio, FY10 Dividend should be around Rs.20-25. (Rs. 6 Has been paid already)
- At pessimistic FY10 PE of 8 price would be around 880 and at optimistic PE 10, FY10 EPS 110, price would be anywhere around 1100 within 6 months
- So i feel that in this scrip good returns from 40% to 80% can be earned with good dividend yield.
===============================
I still feel that below 800, Hawkins can be good buy..

Also Hyderabad industries is also attractive buy from FY10 EPS point of view. it is still quoting under 600...

regards
Aniruddha

Shiv Kumar said...

Agree with you entirely on Hawkins. But Amrutanjan is a different story. Growth in sales is absolutely nothing to speak of so such a stock would correct very sharply during a market decline.

sandy said...

Its hard to find good value stocks these days and on top of that when one realises that he missed a few good opportunites like hawkins u feel like kicking urself....uggh and was so close to buying it but maybe becozz of bad luck or some unfathomable reasons didnt act promptly.
"the costs of sitting n thumb-sucking can be huge" - warren buffett

rayhaan said...

hi guys,
anyone wanna have a look at temptation foods-
(sorry for this attempted "blog hijack " mr.rohit)
2008-09
dividend-60paise
sales-830 crores
profit-55crore
eps -20
book value-rs92
brands-everfresh ,karenanand etc
price-rs 30!
9 months ending in dec 09
eps-26.75
i know this is quite a simplified "analysis" (or as u probably might think random vomiting of data)
any coments will be welcome
by the way amrutjan still looks a bit good
p.swith so many low p/e and d/e oppurtunities around in small caps as well as textiles(siyarams) y r we crying?(lol)

drmadhupv said...

dear rohit,
once a stock is identified fundamentally,i have started using 2 technical indicators, for price action guidance. they seem to work well. 1. accumulation /distribution.2. price/ vloume index.what do u think
regards
madhu

Rohit Chauhan said...

Hi lucky
you are right ..there are benefits of errors of commission as long as the errors are small. sometimes there is no better way to learn

hi mash
i write mainly about value investing. to learn more read warren buffett's letter to shareholder at berkshirehathaway.com. it will change you prespective

rgds
rohit

Rohit Chauhan said...

Hi anirudha
i got your email and never got to responding to it. i think your analysis makes sense for hawkins. at the current price, it may be fairly valued. also the point is now how hawkins will do in the long term. that is more key now that the stock is no longer very cheap.
the key in that is not to just look at FY10 and FY11 numbers, but look at the next 4-5 yrs numbers and beyond as any PE above 15 discounts the next 4-5 years results at a minimum

on hyd industry, i have not looked in depth, but if i remember there were some management quality concerns

rgds
rohit

Rohit Chauhan said...

Hi shivkumar
growth is not the only determinant of value. a low growth stock can have lower value,but the return on capital and how long it will exceed the WACC is more important.

during market drops, typically overvalued stocks drop more than undervalued stocks, which may always be related to the growth of the company

rgds
rohit

Rohit Chauhan said...

Hi sandy
the risk is less in missing ideas than of feeling the urge to act in haste when the next idea comes along

rgds
rohit

Rohit Chauhan said...

Hi rayhaan
i had a quick look at the numbers. the company looks intriguing..selling @ 1 times PE. requires deeper analysis as to why it is so cheap

rgds
rohit

Rohit Chauhan said...

Hi madhu
i generally dont look at technical factors as i am not looking at timing the stock. if i am done with my analysis, which was not so in the above cases, i will be build my position quickly if i am convinced

rgds
rohit

sandy said...

hey rohit,

how do u estimate the normal earnings for a cyclical commodity business?

hey check out some of these cash flow generating companies Gujarat state fertilizers (GSFC) and aditya birla chemicals and competent autombolies co?

Pradeep said...

Patience and discipline is of utmost importance.

But how about aggressiveness and consolidation?

Once you are convinced of the valuation and getting to fill in at that price then go in full force; put all your money to make the most?

anurag said...

Dear Rohit,

The analysis of current FnO data and TA,gives a Nifty target of 4800 by April 2010.

If the above is correct,then this would be my 4th call on your blog.

If you remeber when Nifty was at 5050 I gave an target of 5400 in your blog,and y'day we hit 5344:)).

Regards
Anurag Awasthi

P.S:If for any reason you wish to delete the above comment from your blog.I will not get offended.As I konw that you despise timing the short term market trends

Anonymous said...

HI rohit !

Nice posts, am new to the how-to-investing world. well, actualyy am doing some stuff since few years but could not really focuss on the real thing.
From ur posts it seems u have chosen the safe way. I feel, We do lose sometimes one some gud picks due to our paranoia, but then, better be safe than sorry.
i would be looking forward learn a lot from ur blog.


Bunny

Anonymous said...

Also rohit, did you have a look at Videocon Industries? I mean i have not read all your posts, nd i do regret tha;)

Your opinion on the stock will be welcome.

Bunny

Rohit Chauhan said...

Hi sandy
its not easy to compute normal earnings in commodity biz as there is really no normal in case of commodities. its always a boom or bust ..so the idea is to look at the last 5-10 yrs and look at the structure of the industry and see no. of yrs the industry is profitable v/s losing money. ofcourse more the profitable yrs the better.

for ex: sugar has more down yrs than up years and hence the normalised earnings are lower than a steel or cement where it takes longer for capacity to be added

Rohit Chauhan said...

hi prasad
yes,thats true ..but its easier said than done, atleast in my case

Rohit Chauhan said...

hi anurag
i have no issues with the comment. i dont believe in market forecast, but then i am in a small minority.

its up to readers to figure it out ..its their money end of the day. if market timing works for someone, more power to them

rgds
rohit

Rohit Chauhan said...

Hi bunny
i have not looked at videocon and not convinced about management in case of this company, so unlikely i will do so

rgds
rohit

Anonymous said...

Don't get tempted by temptation foods. the mgmt is not worth it for proper investing - i dont know about speculation. Just see the company's moves in the past few years and have a look at the full coloured Annual Report. I rest my case.

Sachin Purohit said...

Seems like some people tracking your moves are taking decisions based on your analysis before you could!