Use brokerage reports to gain insights

It has become fashionable for investors to slay brokerage reports and broking community as whole, while there is no denying fact that sell side analysts often have incentives to churn out report after report to keep the client trading, However we can’t discard the good work done by brokerage community, some of the brokerage houses certainly do a fair leg work and follow-up on their recommendations.

I think we as investors can benefit by using one simple principle – Separate Fact from Fiction

So how do we do it ?

Inquisitiveness will help us, in this post I would run an example using an ICICI Direct and Dolat Capital report on IPCA laboratories to demonstrate how we can leverage on good work done by these brokerage houses. Interestingly one brokerage is recommending sell while other one is recommending buy – Love these situations 🙂

Let’s begin download copies from here & here, and to gain maximum from this post keep those reports and read them in tandem with content below

First up commentary on,

Operating Margin

ICICI

EBITDA margins increased ~314 bps to 24.7% (I-direct estimate: 24.0%) mainly on the back of an improvement in gross profit margins and

… Read the rest

How to avoid weapons of influence in investing ?

Robert B Cialdini’s Influence: The psychology of persuasion is a must read for any budding investor and thinker. In this best seller he describes six weapons of influence that are often used by marketers/smart people / organisation to stir an automatic reaction from subject many a times to the benefit of the user of weapon

What are these weapons and how we should avoid them in investing when they are used against us ?

We avoid them by learning about them, Let’s start

Reciprocation – The rule of reciprocation says we should try to repay, in kind , what another person has provided for us . Seems so obvious if someone invites you for a dinner at home you do so by inviting other person to your home .

In investing how can someone trick you ? I have experienced such situations let me throw an example at you

Complete stranger on Twitter : Hi, How are you ? I have just read “Evaluating Moats through Floats” on Tankrich and have found it really helpful, I have some more question for you ?

Me : Thank you , please let me know what questions you have.

Stranger :

… Read the rest

Don’t be scared of stocks hitting 52 week highs

If you are a value investor and short-term investing is an untouchable concept for you perhaps you will not find much interest in below post

As a traditional investor we don’t know pay attention to stocks hitting 52 weeks highs on a regular basis as they are considered to be hot stocks or tip stocks gamed by speculators. But ignoring such stocks in not a great idea if you are a practical investor

Imagine you were a retail investor and had seen Symphony Ltd mount back to back 52-week highs in Jan’14 . Due to the way we are programmed we would ignore such info and look for other bargains in the market

Have a look what happened in one year

sym-52

In last 365 days the stock has hit a new 52 week highs (the green dots) 67 times. Almost 1.25 times a week

What stops us from buying 52-week high stocks ?

Anchoring bias – The anchoring effect describes how we can be influenced, or “anchored,” on specific information, when stocks are at a 52-week high, this creates a psychological barrier of sorts, beyond which investors think the stock is unlikely to go. Investors discount the possibility that the … Read the rest

The-Most-Importat-Thing

The most important thing

The last post of 2014 would be to learn from one of the investment classics, “The most important thing” by Howard Marks.

The book has a clear disclaimer in its introduction and I love, it reproducing for you below

You won’t find a how-to book here. There’s no sure fire recipe for investment success. No step- by- step instructions. No valuation formulas containing mathematical constants or fixed ratios— in fact, very few numbers. Just a way to think that might help you make good decisions and, perhaps more important, avoid the pitfalls that ensnare so many.

Now coming to understand what is the most important thing in investing, the Most Important Thing is not a single thing but a of host things . . first up is second- level thinking , in words of author

First- level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first- level thinker needs is an opinion about the future, as in “The outlook for the company is favourable, meaning the stock will go up.” Second- level thinking is deep, complex and convoluted. The second level thinker takes a

… Read the rest

Use earnings framework to find great business

One quote is copy pasted on my desktop as a sticky note and I read it every time I look at new investment opportunity

What to look for in a great business?

A high return on capital (not contributed by a very low margin operation where margins could fall) which is sustainable – pricing power, low cost advantage etc. Ability to deploy incremental capital at high rates of returns i.e. growth prospects. Ability to self-fund growth – Prof Sanjay Bakshi

A useful way to start would be to create a framework that can help us identify great businesses. Let’s try to build a framework by analysing earnings of company as in long run it is earnings which drive stock prices

But how do we analyse earnings of the company? I use a triangular approach

Determine the authenticity of Earnings – To ensure an accountant is not cooking the books and accrual earnings reported by company are authentic

Composition of Earnings – A simple DuPont break down of ROE to determine sources of a company’s return on equity. This would help us understand what contributes to high or low return on capital

Source of growth of Earnings – Understanding what factors … Read the rest

Porter

Get a template to analyse companies using five forces

Porter’s Five Forces Model is very qualitative in nature. It does incorporate some quantitative factors but for the most part, it is a very subjective approach. This post attempts to set quantitative assessment of Porter’s five forces.

A general check point before you begin Porter five force quantitative analysis, one should be able to clearly articulate and understand the economics behind the business of the firm which you are evaluating

Use the below template to analyse five forces

Porter Force How to Analyse
Threat of Entry Economies of Scale See if the per unit / tonne cost is going down with capacity expansion
Check if company can outsource non core operations, that should improve gross margins
Check average capex requirements, this should be trending down
Product differentiation Check competitor prices of products, Is it a price maker or taker in the industry
Look at EBIDTA margin, A company with EBIDTA margin is likely to have differentiated product
Check Sales price per piece if applicable and compare it to competitor
Cost advantages Compare net profit margin with peers, stack the competitors from high to low in terms of net margin
Distribution Channels For consumer goods company or companies selling through agents,
… Read the rest

How to determine size of bet ?

There are two schools of thoughts lets contemplate over them

Balanced diversification

Rohit Chauhan – On his blog [Emphasis Mine]

My bet or size of the position is generally 2% or 5 % and a max of 10% if my level of confidence is very high. However I am not into portfolio balancing. So if my best idea has done well and is now say 20% of my portfolio and I think is still undervalued, I let it run and remain in the portfolio. The only time I would sell would be if the fundamentals of the company deteriorate or the company becomes highly overvalued

Concentration

Warren Buffet – 1965 letter to Partners [Emphasis Mine]

I am willing to give up quite a bit in terms of levelling of year-to-year results (remember when I talk of “results,” I am talking of performance relative to the Dow) in order to achieve better overall long-term performance. Simply stated, this means I am willing to concentrate quite heavily in what I believe to be the best investment opportunities recognizing very well that this may cause an occasional very sour year – one somewhat more sour, probably, than if I had diversified more… Read the rest

Case Study – Value Companies – Noida

Valuing companies is a combination of art and science The DND Flyway (Delhi Noida Direct Flyway) is an eight-laned 9.2 km  access controlled tolled expressway which connects Delhi to Noida, an industrial suburb area. It was built and is maintained by The Noida Toll Bridge Company Ltd which we will try to value in this post

We discussed few valuation methodologies for a fast grower like CERA in previous post in today’s post we will try to value a slow grower /annuity kind of business

We will use below methods

Company Type Valuation model Basis Driven by Assumptions
Slow Growers Average PE Value Method The company is valued at its average PE for last 5 years Earnings Implicit assumptions that company would trade at average PE
  Economic Value Method Current EPS is converted to perpetuity with model discount factor Earnings Share is treated as perpetual bond
Liquidating business/ Cyclical / No growth business Graham Number Theoretically, the maximum price that a defensive investor should pay for the given stock Earnings To be used in bear phase for cyclical business
Fast growth Companies Graham Intrinsic Value The formula as described by Graham in the 1962 edition of Security Analysis Earnings The
… Read the rest

Case Study – Value Companies – CERA

Valuing companies is a combination of art and science – CERA sanity ware is a fast growing consumer focussed bathroom solution company in India, which we will try to value in this post

Before valuing any company answer these basic questions, this will enrich your research

 

  1. Do you understand the business ? Is this an industry you are comfortable talking about ?
  2. What does the company do to make money ?
  3. Is company taking undue advantage of any of its stakeholder ?
  4. Will Company be in business for next 5 to 10 years ?
  5. What is the competitive advantage of the business ? (Moat)
  6. Does company has ability to raise prices ?
  7. Is the product differentiated ? Corollary to the above question ?
  8. Is management honest and competent ?
  9. Is the business capital-intensive ?
  10. Is the business doing mindless imitation of peers ?
  11. Are debt proportions for company meaningful ?
  12. Is it selling for substantially less than they’re worth, or B) that the intrinsic value of the business was going to grow at a compound rate which was very satisfactory

Then equip yourself with various valuation methodologies to answer question 12, I use below as guide, and its evolving … Read the rest

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How to Time markets ?

Before you pull out the gun and knock my head off even for suggesting to time market, let me tell one such experience where discipline and patience has helped me to time market

Lets begin – Cicra Feb 2011
I had accumulated decent savings in short term debt funds and hence I started to look for opportunities in stock market, My strategy was to look where the smart money is investing in small and mid cap space, so I started digging holdings of successful mutual funds , funds which had given more than 18% CAGR return for last 5 years
Quite a few funds were shortlisted, next I sorted these funds with least expense ratio and then chose five funds in order of highest 5 year CAGR returns.
The subsequent exercise was to determine stocks owned by these funds, a minimum of two funds should own a company to make it to final evaluation list, you can read this method in a detailed post I did some time ago
Final list looked liked this

IPCA-1

Do I under all of the above business?

Obviously no so chemical companies – Bayer, Tata Chemichals, Zuari,UPL were first shown the door followed by Mining … Read the rest

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