I have a preliminary list of companies, which I am looking at more closely now. These companies have passed the 5 min smell test (nothing obvious to reject these companies), but now require a more detailed analysis to make a decision.
I am listing two such ideas below. I do not hold any of the companies as of today and may not buy the stock if the company is not good enough for any specific reason
Geojit BNP Paribas
This is a financial services company – providing stock broking, portfolio management and other distribution services. The company has over 5 lac clients and now over 500 offices across the country.
I personally, use their brokerage service and have found to them to be on par with the other brokerage services. I am not pitching their service to you – I don’t have any financial relationship with them – just a customer as anyone else.
The company’s business is tied to the fortunes of the stock market and is very volatile. The company has grown its revenue from 80 odd crores to around 250 cr +. The net profit has grown from 18 Crs to around 50 Crs in 2010. This growth however has not been a smooth upward trend. As expected, 2009 which saw a severe bear market, saw a drop of 20% in revenue and 80%+ drop in net profits.
In spite of the volatility, the company has been doing well by expanding the client base and offices. The company is now selling at a very attractive valuation of less than 10 times earnings (with 30% of the market cap in the form of cash). In addition the company is also expanding in the gulf countries through various Joint ventures
Finally a key point – Rakesh jhunjhunwala is a director and a majority shareholder in the company. That in itself, does not mean that we should close our eyes and buy the stock. However, the company is definitely worth a closer look
Caution – If you look at the price history, you will realize that the company has dropped in price in the last 6 months. Now if that excites you, welcome to my world. A stock which has dropped in price in the recent past is good place for me to start investigating – does not mean I will buy the stock, but will definitely start analyzing it.
Deccan chronicles
This is a very interesting idea. It is a company which is way out of my comfort zone – It’s a publishing company which has also invested in an IPL franchise.
The reason I got interested is that the entire company is selling for 1600 Crs and a sum of parts value is around 4000 Crs (caution – this is just a back of the envelope calculation)
Let’s look at the various parts -
Deccan chronicle news papers
Supposedly, one of the leading papers in the south (based on the numbers provided by the company – 13.8 lakh readers in 2009 up from 4 lakh readers in 2005).
The newspaper business is generally a very profitable business and has great economies of scale – the marginal cost of adding a subscriber is fairly low and the contribution to the profit from each additional subscriber is fairly high.
This business made around 260 Crs in 2010 and can conservatively be valued for 3000 Crs.
IPL team – Deccan chargers
The other business, if you can call it that, is the IPL team – Deccan chargers. This business is barely profitable, but the latest auctions have netted around 350 Million dollars – which comes to around 1500 Crs and change.
Now, this valuation can be debated (depending on one’s point of view and whether India progresses in the world cup :)) – but let’s value this at 50% of the above auction price for the time being – 750 Crs
Beyond, the above two above business, there are some smaller business which I will ignore for the time being.
Total value
So the total asset value is around 4000 Crs and the debt of around 600 odd crores is offset by the cash on the books. Also, I will not worry about the debt as the newspaper business is pouring cash.
So the company is selling at less than 40% of asset value. In addition, the company has also announced a buyback of almost 270 Crs, which at current prices will reduce the share count by another 15%.
What am I still waiting for ?
So why I have not sold my dog, my car and my cow (ok, I don’t have a cow :) ) and bought this stock. There are a few things which give me a pause.
- I have to make up mind about the management. Is the management like other publishing companies like sandesh – using the cash flow from a superb business (publishing) in all kinds of ventures or are they astute capital allocators? Market will value this company at the appropriate valuations only if the management allocates the cash flow from the core business into attractive areas
- What is a publishing company doing in the sports franchise business?
Anyway, if something is too good to be true, it usually is. I am still trying to look closely at the company to see what I am missing here
As always, please do your research before you buy the above stocks. I am not recommending these stocks and have no interest in doing so.
March 23, 2011
March 14, 2011
Cleaning up the Zoo
My portfolio is now a certified zoo. Although the bulk of my portfolio is in the top 10 holdings, I still hold several stocks which are not as attractive. I initiated a clean up few months back, but it is not as easy as i thought it would be.
How did I get here?
I have always had this problem to a certain extent – call it the teenager syndrome :) - I fall in love with a different girl every month. The problem is that although I fall in love with new girls, sorry stocks, I have refused to let go of the old flames.
Some old flames are worth holding. Companies like asian paints, crisil and Gujarat gas are part of my core portfolio now. They may become overvalued from time to time, but they have phenomenal business models and great competitive advantages. These companies, if bought at the right price, are likely to give great returns over a period of 10 yrs.
The same is not true of several other stocks in my portfolio such as bharat electronics, Honda siel power products or novartis. These are companies with decent economics and fair management. It is just that they are not as attractive, both from a valuation and future performance perspective – call them mediocre stocks (though decent businesses).
I have been too slow in realizing that these stocks, at current prices, will not give great returns going forward.
So what should one do?
The most rational approach would be to sell the stock when it is selling at fair value or when a stock with superior risk reward characteristics is available.
I have usually been able to do that fairly well when the stock is very close to fair value or if I think the economics of the business are no longer attractive (or I have simply made a mistake in understanding it). I have been slow in making a decision on stocks which land in a grey zone. These are stocks selling at a moderate discount to fair value and have average prospects.
An example
Let me illustrate with an example – Bharat electronics. I purchased BEL in 2008-2009 time frame at an average cost of around 850 and have been able to get 100%+ returns in 3 years including dividends.
These returns though decent, are not earth shattering. They are in line with the returns I expected from the company when I invested in it. This company has a near monopoly in the Indian defence market and should keep doing reasonably well in the future.
I personally think that the stock is around 15-20% undervalued and is unlikely to give not more than 12-15% returns per annum over the next few years. These are decent returns, but unlikely to get your heart racing.
The key to such stocks is hold them till the undervaluation corrects itself and then be able to dispassionately analyze the stock and exit , if there are better opportunities available
If you know, why not sell it?
Good question – call it the endowment bias or inertia, but I have been slow to react. It has also been partly due to the issue of opportunity cost.
For most part of 2010 and 2011, I have not invested more than 50% of my net assets with the rest being in cash as I have not found attractive enough opportunities. In such a scenario, a moderately underpriced BEL seems to be a better choice than holding cash. The downside of such a thought process is that soon the portfolio becomes a zoo and one’s mental space (list of stocks being tracked) becomes too crowded.
So whats the plan?
Sell – though it’s not easy to sell and hold cash. In addition, one also faces the risk of regret if the stock which was sold recently, has a run-up after that. Who said investing was easy?
In the end, however to keep my sanity intact and manage a reasonable list of stocks, I plan to bite the bullet and sell these kind of stocks.
How did I get here?
I have always had this problem to a certain extent – call it the teenager syndrome :) - I fall in love with a different girl every month. The problem is that although I fall in love with new girls, sorry stocks, I have refused to let go of the old flames.
Some old flames are worth holding. Companies like asian paints, crisil and Gujarat gas are part of my core portfolio now. They may become overvalued from time to time, but they have phenomenal business models and great competitive advantages. These companies, if bought at the right price, are likely to give great returns over a period of 10 yrs.
The same is not true of several other stocks in my portfolio such as bharat electronics, Honda siel power products or novartis. These are companies with decent economics and fair management. It is just that they are not as attractive, both from a valuation and future performance perspective – call them mediocre stocks (though decent businesses).
I have been too slow in realizing that these stocks, at current prices, will not give great returns going forward.
So what should one do?
The most rational approach would be to sell the stock when it is selling at fair value or when a stock with superior risk reward characteristics is available.
I have usually been able to do that fairly well when the stock is very close to fair value or if I think the economics of the business are no longer attractive (or I have simply made a mistake in understanding it). I have been slow in making a decision on stocks which land in a grey zone. These are stocks selling at a moderate discount to fair value and have average prospects.
An example
Let me illustrate with an example – Bharat electronics. I purchased BEL in 2008-2009 time frame at an average cost of around 850 and have been able to get 100%+ returns in 3 years including dividends.
These returns though decent, are not earth shattering. They are in line with the returns I expected from the company when I invested in it. This company has a near monopoly in the Indian defence market and should keep doing reasonably well in the future.
I personally think that the stock is around 15-20% undervalued and is unlikely to give not more than 12-15% returns per annum over the next few years. These are decent returns, but unlikely to get your heart racing.
The key to such stocks is hold them till the undervaluation corrects itself and then be able to dispassionately analyze the stock and exit , if there are better opportunities available
If you know, why not sell it?
Good question – call it the endowment bias or inertia, but I have been slow to react. It has also been partly due to the issue of opportunity cost.
For most part of 2010 and 2011, I have not invested more than 50% of my net assets with the rest being in cash as I have not found attractive enough opportunities. In such a scenario, a moderately underpriced BEL seems to be a better choice than holding cash. The downside of such a thought process is that soon the portfolio becomes a zoo and one’s mental space (list of stocks being tracked) becomes too crowded.
So whats the plan?
Sell – though it’s not easy to sell and hold cash. In addition, one also faces the risk of regret if the stock which was sold recently, has a run-up after that. Who said investing was easy?
In the end, however to keep my sanity intact and manage a reasonable list of stocks, I plan to bite the bullet and sell these kind of stocks.
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