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An assured way to lose money

By Rohit Chauhan
In Portfolio management, Uncategorized
July 10, 2008
3 Min read
6 comments
A

There are only a few times in the world of investing when you can be fairly sure. Most of my equity analysis has words like likely, could be etc. Equity investing is a probabilistic exercise. You can 60-70 or maybe 90% confident, but no one can say anything with a 100% confidence. There is no such thing as a sure gain.

That is however not the case with the downside. Sometimes you can be sure that you will lose, no matter what. For ex: if you jump from the 4th floor of a building …you get my hint.

With stock markets down, the tendency of a lot of investors would be to take refuge in fixed income instruments such as Bonds, FD etc. But are they really safe ?

Inflation is now at 11.5% and it could stay there for some time. The usual policy action is to raise the short term to slowdown the growth and also the inflation. Due to the poorly developed debt markets in india, RBI does not have the same leverage as other central bankers in developed countries such as the FED. As a result, the RBI will have to raise the short terms rates pretty high to influence inflation. This was the case in the mid 90’s when the RBI had to raise the rates to around 13% to damp the inflation.

The current returns on Bank FD’s is around 10% for 1 year duration. Similary fixed income debt funds are providing a return of around 8-9% before expenses. Net of expenses the returns would be 7-8%. So if you decide to invest in a long dated FD be prepared to lose at least 2-3% of principal by way of inflation.

In the year 2000-2003, interest rates came down from 10%+ to around 7-8%. As a result debt funds gave 15%+ returns during that time period. We could see that phase in reverse now. As short term rates rise, debt funds could give negative returns.

So what should one do ? If I have invest in fixed income debt, I would prefer short duration floating rate funds. See here , to understand what is duration.

I would generally look at the following points when selecting a short duration floating rate fund

– duration of the fund. Should be less than a year. See average maturity in the image at the top
– average credit rating should be AAA
– Known fund house
– Returns for the last 2-3 years should have atleast matched the category returns.

This is kind of investing is really a defensive one. The best outcome one can hope for is preservation of capital net of inflation.

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Opinion on stocks of your choice

By Rohit Chauhan
In Uncategorized
July 8, 2008
2 Min read
17 comments
O

update : 9-Jul

I did not expect a flood of emails and several comments on this post. It was my mistake in not specifiying a limit on the numbers companies per email or comment. As a result i have a list of around 300 companies now to analyse and growing 🙂

To make it manageable for me, i would request you to limit the number of companies to 2-3 per comment or email. You can select your top 2-3 companies and hopefully i would be able to cover the entire list in 2-3 posts.

—————————————————————————————

I get emails and sometimes comments asking for my opinion on stocks. I am thinking of doing, twice a month post, analysing all such stocks sent to me via emails or comments.

Please feel free to leave the stock names through either an email to my id – rohitc99@indiatimes.com or via a comment. I will consolidate the names over 2 weeks and post a quick analysis on each one of them.

However you have to keep in mind the following filter criteria I use to analyse stocks. Stocks which don’t meet these criteria are generally rejected by me without spending too much time on them.

1.Debt/ equity ratio <= 1

2.ROE over a 3-5 year period of more than 12%

3.No losses for more than 1 year in the last 5-7 years

4.Mcap of more than 20-30 Crs (can be relaxed)

5.No obvious fraud by the management in the past

6.PE not more than 40

If the fundamentals are poor, or valuations too high I tend to move on and not spent too much time on it. If like me, you need 10-15 stocks in the portfolio, there is no need to spend time in figuring out a difficult idea when there are easier ones available. A lot of times stocks may have good fundamentals and may be slightly undervalued. In such cases I tend to put the stock on a watch list and would follow it till it becomes undervalued (50% of intrinsic value).

Some of the stocks you may mention may land in such a bucket. It does’nt mean that I don’t find value in the stock, just that it is not cheap enough for me. So please leave names of stocks you want me to look at. If I get sufficient response, I will try to make it a regular effort on the blog.

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Rapid fire analysis of multiple stocks

By Rohit Chauhan
In Investment ideas, Uncategorized
July 7, 2008
6 Min read
9 comments
R

In the previous post, I was asked to give an opinion on several stocks. I have fairly broad filters when selecting stocks. As a result I drop companies pretty quickly. Once they make through my filters, I spend quite a bit of time analysing and mulling over them. Frankly I don’t need more than 10-12 stocks to build a decent portfolio, so I don’t spend time on companies which don’t catch my attention, either due to the fundamentals or due to valuations

So here is my opionion on the stocks listed in the comments (please note the word opinion as I have really not done a detailed analysis on them)

Please note that for a stock to excite me, the fundamentals have to be good and the stock has to be fairly undervalued (selling at 50% of intrinsic value). So you may find that I am not too enthusiatic of some stocks if they don’t appear to be undervalued to me even if the fundamentals are good.

Following stocks are from mumbai jurno

Punj Lloyd – The net profits have grown by 30 times in the last 4 years. The company has a debt equity ratio of more than 1 which is on the higher side for my comfort. The market has recognized the rapid growth and inspite of the recent drop, the company is valued at 30 times its recent earnings. I personally will not invest in this stock for two reasons – I am not confident if the company can continue this level of growth and the valuation are on the higher side for me.

Voltas – I was invested in bluestar from 2003 to 2006 (see here). I exited blue star last year as I found the valuations to be on the higher side. The company has shown a high profit growth ( 5 times in last 5 years) and has a high ROE of almost 50%. The company has very low debt. Though the valuation (PE of around 20) is a bit on the higher side, I would personally put the company on my watch list and analyse it a bit further to make a decision.

Amararaja Batteries – This is the auto components industry. Overall I am not too excited by the economics of this industry. If the auto industry is under price pressure, it is bound to pass on those cost pressures to their suppliers. As a result auto component companies over a business cycle do not enjoy high profits. Most the companies in the industry do not have a high competitive advantage due buyer power, poor pricing strenght etc. I had analysed exide some time back, but never pulled the trigger. This is from memory – I think exide enjoys more than 50% market share in the industry. In such an industry a distant no.2 such as amaraja may not have very high pricing strength and may see its profits dip when the cycle turns downwards. So although the stock appears undervalued, I would be careful jumping into it. Looking into the rear view mirror (last year’s profit) may not be the smart thing to do in this stock. It is critical to figure out how the company will do going forward.

Venus Remedies – Company appears undervalued and has shown very high growth in the last few years. I would have to analyse if the growth is sustainable or not to make a decision.
Kamat Hotels – 2007 Debt equity ratio is 2:1, with the company carrying a debt of 270 Crs in 2007 (have not seen 2008 numbers). This debt is almost 10 times 2007 net profit numbers. This stock would fail to pass my fundamental filters and I generally end up passing on companies with this level of debt

ICSA (India) – This company like Punj lloyd and amaraja has shown phenomenal growth in the last 5 years. On a personal level such growth makes me nervous (although the market gets all excited by it). Before I touch this stock I would want to analyse the reason behind the growth and the sustainability of this growth. Basic numbers do not give the complete story. So I will need to research far more to make a decision on the company. A high growth in the last few years is good thing, but I would not extrapolate that growth blindly and buy the stock.

Axis Bank – Fundamentally a good bank. The P/B ratio is around 3 and the ROE has been dropping for the last few years. ROE is now at 12% which could be due to the additional capital raised by the bank. The bank is doing very well and growing rapidly too. I would personally track the stock, but the price is not cheap enough for me.

Yes Bank – This stock is current sweetheart of a lot of people. If I say something bad, some of you will beat me up 🙂 . The bank has good fundamentals. However at the current P/B of 4-5, the valuation is still too high for me.

From hardtoget

Alok – 2007 AR shows a debt of 3300 Crs (Debt equity ratio of 4). Unless 2008 is drastically different, this company is not for me. A debt equity ratio of more than 1 is generally a no go decision for me. I am not comfortable at all with such a high debt equity ratio, especially in cyclical industry

From vivek

Balmer Lawrie – I hold this stock. See analysis here

Berger Paints – I worked in asian paints and have seen how berger operates fairly closely. If there is one company other than asian paints which is aggressive and does a good job, it is berger. The company has a fantastic sales organisation. The fundamentals of the company are good and the valuation looks attractive too. If I was not as baised towards asian paints ( I hold this stock), I would invest in Berger paints.

Tata Tea – The company seems to have good fundamentals, good brands and decent valuation. I will be analysing the stock further.

Glaxo Consumer – I hold this stock. See analysis here

Castrol – The company has great brands, a good distribution network, very high ROE and great fundamentals. The valuation seems to be a bit on the higher side for me to pull the trigger. My key concerns are management quality and impact of oil pricing on the company’s profits. A few years back, I think the management tried to buy out the domestic shareholders at a low price. As a result I am not too comfortable with the management. In addition need to see if their margins will be impacted drastically by the oil price changes.

Hindustan Sanitaryware – Fundamentals look good, although the 2007 debt is a bit on the higher side. The valuations are quite attractive. I think the company is worth a closer look.

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Wish I sold off my entire portfolio in Jan !!

By Rohit Chauhan
In Uncategorized
July 2, 2008
2 Min read
15 comments
W

No, I have not been wishing that or whining about it. I have heard several of my friends wish that they had done that. Short of knowing the future, it would have been impossible to time the market that well.

I too have losses due to the market drop. However I am not dissapointed or wishing otherwise. It has nothing to do with being brave and more to do with being rational based on my approach.

This is how I construct my portfolio. I typically start buying at or below prices, which are 50% of conservatively calculated intrinsic value. Ofcourse at the peak in Jan, most my holdings had gone up (in some cases too fast) . However they were still trading at a discount to their intrinsic value. Hence I saw no reason to sell my stocks. However as they were above 50% discount levels, I was not doing any major buying too. As a result, after creating a small position in some stocks, I was doing nothing and just twidling thumbs.

Now with the market crash several of my holdings are below the 50% discount mark. There are quite a few new opportunities coming up too. So I have now started accumulating stocks which I had analysed in the past, but the price was not attractive enough.

So the point is this – If you felt the stocks in your portfolio in jan were not overvalued enough to be sold then, they should even more attractive now. If you did not sell then, thinking that they were not overpriced, you should buying more now. Ofcourse this assumes that the fundamentals have not deterioated suddenly.

If however you are pessimistic about the stock after a 30-40% drop, then you need to do some honest thinking. Either your analysis was wrong or the current pessimism is getting to you.

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