April 28, 2010

Are you flying high?

I was. If you are invested in midcaps or small caps, then it is likely that you would have seen some of your picks jump 5-10% in a day. I have seen some of my picks jump by that amount and some of the companies I was analyzing have gone up by the same amount and thus rise beyond my buy levels.

Feeling happy?
So how did you react to all this? happy?
I can bet that you must feeling good about it, unless you love self torture,. I was feeling good too, till I realized that the mid-cap and small cap index has risen by 100%+ in the last one year with several stocks going up by 200-300% percent in the same time.

When I saw this statistic, it poured cold water on my euphoria and reminded me of the following quote
‘A rising tide lifts all boats’

So there is nothing special in my boat or in other words, in my stock picks. I was lucky to be in the right place at the right time.

What does this mean?
If you are thinking – what makes this dude happy? A 100% rise in the midcaps and small caps and all he can do is whine about it!

Don’t get me wrong. I am happy that my picks and possibly yours have rise so rapidly in such a short time. If you had the courage to buy stocks a year back, then you have been justly rewarded.

The under pricing however got corrected some time back and now we may be entering a bit of a happy zone where everyone thinks that the future is going to be all bright and sunny and there will never be any problems.

The reality is that the future is never crystal clear. This risk we now face is that any negative news can cause the sentiment to sour and the midcaps or small caps to drop.

What to do?
As I said in my last post, I have started selling those stocks which I will not buy if they were to drop 20% from current levels. If I am not too optimistic of the fundamentals or think the stock is at fair value, I have started selling my holdings. I may be completely wrong about it and we may get another 50% rise.

So be it.

I think in my case greed is more difficult to manage than fear. I did not second guess myself to load up on stocks last year when the market tanked. The decision to start selling now is more difficult.

What am I selling?
I have started liquidating my smaller position like Denso, VST etc. I will however hold my long term holdings such asian paints, CRISIL etc. If the market tanks, I will load on them further.

Should you do what I do?
Think of it this way –
What incentive does Rohit have in mis-leading me? (Hint – none!). So you can listen to me.

What if I am wrong? Do I lose anything? No, I don’t. This is a personal blog, so I can write whatever I like. Hopefully I am not adding to the crap out there on stock markets :)

So please do your homework and think twice before taking free advice :) (does not mean paid advice is any better)


Pradeep said...

Are you selling stocks because you feel they have reached your estimate of intrinsic value? I did invest in the last 4 months in a few mid caps and small caps and I felt they were trading at low P/Es of 6-8 for their fundamentals. But they have not corrected much. Was just wondering..

Rohit Chauhan said...

Hi pradeep
thats right ..its mainly because i feel that some of stocks i hold have reached fair value and i am better off selling them.

i dont have a clue where the market will go from here..if it drops i can re-deploy the capital some other good ideas


Vic said...

and those other good ideas are? :-)

Hey Rohit,

I understand CRISIL and Asian paints are your long term holdings and the intrinsic value is increasing but isn't it reflected in their price? I mean these seems to be overvalued to me by a good margin.



Siddharth said...

Hi Rohit,
Very well written post highlighting your maturity as a value investor. I share the same feelings as yours..observing my small/micro capo picks raise quickly & deliberating very hard whether to sell or not. Really selling is so much more difficult than buying. I also agree with you that the valuations were so cheap a year back that even a monkey with random picks could have earned handsome returns. However one thing i have observed is that certain quality small/mid cap stocks which got hammered unjustifiably in the crash have given returns of 300-500% whilst the market has risen 100%. I failed to pick up any such stocks :( but i feel investors who had them in their radar & loaded up do demonstrate some skill rather than just luck. Knowing what to buy when everything around is a bargain is a crucial skill in my opinion. Another question i have is some what similar to Vic's question. Between a small/mid cap pick & large cap pick of yours are you more likely to sell off the small/mid cap pick as it approaches fair value??

Mahavir said...

can yuo pls share your opinion on current results declared by facor alloys

Sunny Talreja said...

Hi Rohit,
I feel most of the stocks are overvalued, maybe because I firmly believe in fundamental analysis and P/E ratios of most midcaps and smallcaps don't justify their further growth hence I expect a 20-25% correction in their value. Based on which, I have sold off more than 70% of my shares.
If you want to keep Asian paints and alikes, I would suggest you to do fundamental analysis of them as well. The technical analysis is totally useless for long term investments.

Pradeep said...

Dear Rohit,

I have 2 queries on valuations based on value investing principles.

1. Lets say there is a company which has achieved a growth of 25% and a ROE of 20% in last 10 years. If we have to find the intrinsic value conservatively do we assume roughly 10-12% growth and 10% ROE for next 10 years (like I see you doing for many companies where you assume future to be average compared to past) and no growth after 10 years and find the intrinsic value and then again based on conservative principles, expect to buy only if you have a 40% discount to this? Do we take this double conservation approach i.e. conservation in growth estimates and margin of safety conservation? Have you strictly followed this and if so, how many opportunities do you find usually? I am just starting out and am a bit confused on this aspect since many companies look tempting but I do not take the call to invest.

2. Some companies, especially in the small cap space have grown really fast in last 5 years. How do you estimate normalized earnings power in that case. Does that even apply to companies which have grown like that. Like 1,3,5,15,25 crores PAT in 5 years. I usually average it out for 5 years and then find EV/EBIT but obviously it comes as overvalued. What approach to follow for such companies? These are not cyclicals but companies whcih have grown in the post 2003 period due to general economic growth.


Ravi said...

Hi Rohit,
I am curious about your take on holding big winners that have say 100% returns just in one year keeping the direct tax code that is going to come into effect next year. If we sell them and buy them after say 2 or days then we can show that as long term capital gains this year which is not taxable. However from next year anything you sell attracts tax and hence it makes sense to buy at this price so the tax we pay whenever we sell later would have less tax outgo.. In my opinon its better to pay say 2% for brokerage (for buy and sell inclusive) than pay 10 to 30 percent on the big profit later. Hope I have made myself clear. I just wanted to get your comments on this line of thought. I have started selling all holding that in my opinion have crossed IV and also have made big gains with a clear strategy to buy them again for long term holding.

C.C.Gemini said...

"some of stocks i hold have reached fair value" Please explain what you mean by it and how do you come to a conclusion.Next, avoid explaining in conundrums and be precise unlike many others who run blogs such as this.As far as possible site examples that will make the explanaton easy..

Saif said...

Hello Sir,
there is a buy back offer of shares from Manaksia .Would like to hear your views on any arbitrage opportunities possible and how to carry them out .
more details here

Short summary...buyback of arnd 9% equity .max of 50 crores reserved,and price not exceeding 200rd.(Stock locked in upper ckt for 2 days,and is now at 136)


Rohit Chauhan said...

hi vic
not too many ideas these days, but i would prefer to hold cash and continue analysing companies and buy when the price is right

the thing with apaints and crisil is that we tend to underestimate the fair value. also it does not matter if they become slighlty overvalued sometimes ..makes sense to hold in the long run


Rohit Chauhan said...

hi siddarth
couldnt agree more with your comment.

there is definitely skill in identifying the better of the mid/small caps especially if one can demonstrate that over time.

to your and vic's question - i would sell mid or small caps earlier ..but frankly my decision is not based entirely on the cap..but more on the nature of the biz. i would hold a crisil much longer than a denso or a cheviot


Rohit Chauhan said...

hi mahavir
i saw the result and not impressed. kind of confirms my view that the biz is cyclical and not worth more than 10 bucks


Rohit Chauhan said...

hi sunny
i dont do tech analysis. my view on apaints and the like is based on their fundamentals. these are long term holding for me and i will not sell unless they are grossly overvalued

most companies are closer to fair value ..when and by how much they will correct ..i dont have an idea


Rohit Chauhan said...

Hi pradeep
valuation is as much an art. there are no fixed formulaes frankly and it depends on the company.

i would assume an ROE of 25% if there is reason to believe it will hold..but i am more cautious on growth

i actually do scenario analysis - look at the range of growth and ROE/Margin scenarios and see what is the valuation and what the assumptions underlying each. that helps one in seeing the distribution of fair value and not fixate on one value

midcaps and small caps get very tricky. with very growth during short period of 5 yrs one has to ask if it is sustainable ..that is more critical than the valuation

Rohit Chauhan said...

hi ravi
i agree with your comment. i am planning to do the same with my long term holdings too


Rohit Chauhan said...

hi cc gemini
my portfolio is published on the blog ..see header. i have link on the stock and its analysis. i have stated which stock i have sold. thats is explainatory

unlike other blogs i do not give specifics on my portfolio ..i analyse stocks, give fair value and leave it at that. you make your own decision to buy or sell

my blog is to share learnings and not give tips and recommendations. there are enough blogs which do that

Rohit Chauhan said...

hi saif
had a look at the offer ..not much of an arb here

mcap is 900 cr ..open offer thro market is fr 50 crs ..so they may end up 6-7% of equity against a float of 35%. i dont think there is an arb situation here ..some small pop..but no valuation comfort too ..company selling at 40 times

C.C.Gemini said...

RohitSir I had missed out on your portfolio,I shall study it on my level.You have in fact cleared a point or two...

rayhaan said...

hey rohit,
u really gotta check out theequitydesk.com . I think u ll like it
p.s please have aluk attemptation foods
also have a lookk at the valueinvestor application on fb

sumi said...

Hi rohit,

After a long time I am reading your blog. I am in a similar state. I feel many mid caps n small caps have reached a very high level. Maybe not my final target but still quite a high gain. It may make sense to sell now and buy at lower levels. Of course there are certain long holdings which I wouldnt like to touch.

@rayhaan- equitydesk is a nice site. Which is the valueinvestor application on fb? sounds interesting

Rohit Chauhan said...

Hi CC gemini

i am a fairly idyosyncratic person ..so you will notfind my blog to be like others :) both in a good and bad way.

my approach is to teach others to fish ...and let them decide.

ofcourse that is against what almost everyone wants ..which explains the lesser number of readers compared with other similar blogs. but then why compromise on stuff u dont believe in


Rohit Chauhan said...

i have visited TED in the past and posted ocassionaly as rohitc99, but i dont do that often

i am concerned about mgmt issues at temptation foods


Rohit Chauhan said...

hi sumi
good to hear from u on the blog. i am going mainly by valuations and selling off stuff which is close to fair value,not necessarily to buy it back