Yes Bank and the Setup Contrarian Investors Dream About - The 5 Minute WrapUp by Equitymaster
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Yes Bank and the Setup Contrarian Investors Dream About

May 2, 2019

Tanushree Banerjee, Editor, The 5 Minute Wrapup

Merrill Lynch got out of the commodities business in 1998. The bank hadn't been making any money in commodities for quite a few years.

The same year, veteran investor Jim Rogers launched his commodity index fund.

What happened next?

The Rogers International Commodity Index soared from a starting value of 1,000 in 1998 to a peak of 6,000 a decade later.

This is the kind of stuff you often hear legends talk about. Here's another such instance.

In June 1960, an anonymous tipster called American Express to expose a massive fraud at Allied Crude Vegetable Oil Refining Corporation. At the time, Allied was the largest customer of American Express's field warehousing subsidiary. It had guaranteed millions of dollars' worth of Allied's soybean oil inventory. The salad oil company faked its inventory, filling its tanks with seawater and only a modest amount of oil. Because oil is less dense than water, it would float at the top, making it appear as though the company had much more oil than it actually possessed.

The shares of American Express fell by over 40% in days. Most funds sold the stock of the credit card company fearing bankruptcy.

Buffett seized the opportunity to buy 5% of the company for US$ 13 m. He later sold his holding for a profit of US$ 20 m.

In both cases, the legendary investors, Rogers and Buffett identified a similar set up:

  • Assets being deeply undervalued because of near term risks
  • Big investors moving out of the assets

And they lost no time to take advantage of the market mispricing to make their biggest contrarian bets.

Well, such incidents are rare. Most contrarian investors just dream of such a set up. But when they do occur, only a few have the nerve to act on them.

Yes Bank's losses in the March quarter of financial year 2018-19 were not completely unexpected. Nor is this the first instance of an incumbent CEO front loading all the pain in the books. So that it's easier to take corrective action in future. Banks particularly, have repeatedly seen such action in recent years.

But for brokers and funds that must meet their quarterly and annual profit prediction, the loss may have come as a shocker.

Macquarie's, HSBC's and Citibank's simultaneous downgrade of the stock of Yes Bank hardly seems different from what most fund managers do during such crisis.

But remember the 'set up' that got Rogers and Buffett interested? And do you see the signs here?

Yes Bank may continue to report disappointing numbers for few more quarters.

Contrarian investors must have the patience and the grit to sit through such crisis when it comes to safe stocks.

Like author Nick Murray wrote...

  • All financial success comes from acting on a plan. A lot of financial failure comes from reacting to the market.

Chart of the Day

Smallcaps are certainly a good place to look for big returns.

But that does not mean big bluechips offer you any less over long time frames. In fact, the best contrarian bets on such safe stocks could even offer you handsome three and digit returns.

If you still need more proof, take a look at the following chart.

The Sensex, BSE Midcap index and BSE Smallcap index have had differing degrees of volatility over past fifteen years.

But the returns from the three different indices are mostly in line since 2004. Rs 100 invested in any of these indices in 2004 would have yielded about Rs 700 by March 2019.

In fact, the gap in the compounded annual return of the Sensex and Smallcap index is less than 1%.

Difference in 15 year CAGR of Sensex and BSE Smallcap Index is Less than 1%

Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor and Research Analyst, The 5 Minute WrapUp

PS: At 5 PM, on 14 May, Tanushree will reveal the Greatest Money-Making Opportunity that few Indians know about! Claim your FREE seat now.

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4 Responses to "Yes Bank and the Setup Contrarian Investors Dream About"

sudhin

May 14, 2019

Yes your article did not give the concluding remarks which was disappointing.

Like 

Koushik De

May 14, 2019

Hi Tanushree,
I am curious on your take on YES Bank. After the recent provisioning of bad loans (and the likely indications that not all the skeletons in the cupboard are out) and the 30 %+ correction of the stock, your latest article doesn't clearly spell out a course of action for long term investors (usually you would call a spade a spade).
Question-is this a good time to load up more of the YES Bank stocks? or would you recommend waiting for more analysis from your team/Equitymaster?

Cheers
Koushik

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Anand

May 3, 2019

Good and enlightening article , but at the end your valuable advise on your earlier recommendation to buy Yes Bank is missing. At the end of the day what is your prognosis? Is Yes Bank to be added or not. You left half way with some Buffet / Rogers stuff, keeping your subscribers in suspense. Also your take on the recent result is missing. Untypical of you. Usually you are conclusive on your recommendations.

Like (5)

jeetinder

May 3, 2019

THE NEW CEO IS HONEST IN FRONT LOADING THE PROBLEMS AND RESULTS SHOULD BE BETTER FROM HERE ON,I AM A LONG TERM INVESTOR IN YES BANK AND CONTINUE TO HOLD.IT SHOULD DO GOOD IN NEAR FUTURE ANS AN EXCELLENT LONG TERM BET.

Like (7)
  
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