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An IRR comparison for Hidden Treasure, Small cap index and Sensex
Jan 7, 2017


Dear Readers,

Hidden Treasure will soon be nine years old. And so today I would like take a break from the norm and share with you our journey so far...and where we see the service and small caps going in the coming times.

Serving as editor of this service has been a great time filled with tremendous learning. I must say, no amount of classroom training, even at the finest B-schools or under the best of value investors, could have developed and evolved my understanding of small caps and stock research the way my association with this service has.

One of the best parts of the job is the opportunity to meet managements all over the country. The biggest takeaway here has been - what really matters is difficult to quantify.

You see, the numbers do not tell the whole story. They can even be misleading. No amount of research into small caps is thorough enough until you have a dialogue. Not just with the management, but with stakeholders at every part of the value chain - be it the suppliers, distributors, or clients.

In fact, some of our best ideas didn't come through our financial screeners, but through conversations with these stakeholders as they reveal their most valued suppliers or clients...or their staunchest competition in the listed small-cap space.

So far, the journey has been fruitful.

For the first eight years, Hidden Treasure beat both the Sensex and the BSE Small-Cap Index by nearly three times.

As I wrote to our subscribers in the Research Digest (Subscription Required):

    For Hidden Treasure recommendations, both open and closed, the Internal Rate of Return (IRR)* since inception in February 2008 is 33%. The IRR for the BSE Small-Cap Index and the BSE Sensex is 12% and 11% respectively.

We are yet to have our track record audited for this quarter. Once we do, I'll share the updated performance for all nine years. Meanwhile, here is a taste of what we did last year.

In last twelve months, we have closed nine recommendations (seven with success). The top performers were Balkrishna Industries, City Union Bank, and CanFin Homes with returns of 1,058%, 489%, and 330% respectively.

We had eight actionable recommendations in 2016. We already successfully closed one of them with 90%+ gains in nine months.

Please note that we recommend stocks from a long-term perspective (three to five years). Short-term performance is not our focus. Yet, it is worth mentioning that of the seven remaining stocks we recommended last year, all are in the green.

So far so good.

But recently, one of our subscribers asked a tough question. He was curious to know why we do not have more Page Industries-like recommendations.

For the non-subscribers, Page Industries is Hidden Treasure's best performing recommendation to date, offering gains of more than 4300%. The compounded average return (CAGR) is around 60%.

Honestly, I believe opportunities like Page Industries are getting rarer. Over the last decade, there has been a great change in the investing environment, market behavior, and market trends. For example, when we recommended Page Industries, the small cap index hovered around 3400 levels. It is well above 12,000 now!

The markets are attracting money like never before. Too much influx of capital has made even solid businesses ridiculously expensive. Today I read that equity inflows in mutual funds hit an 18-month high in December. This is despite the rising global uncertainty and weakened sentiments due to demonetisation. Looks like it will take a bigger disruption for valuations to reach a saner zone.

So while businesses in the small-cap space still have the potential to become multibaggers, recommendations like Page Industries will be very difficult to spot, especially in the liquid space.

However, we absolutely believe Page Industry-like opportunities are still available in the illiquid space, but that is not a space for the majority to play in.

Now, all that said, I must mention that within listed small caps (with enough liquidity), opportunities in the coming times are only going to get better. As I wrote in a recent Research Digest (Subscription Required):

    In our meetings with managements, one of the common challenges these companies tell us about is competition from the unorganised segment. The latter operate locally on a low scale and rely mainly on cash sales.

    With all the changes taking place around us, it is the informal segment and unlisted small businesses that will be worst hit. The cost of doing business for companies in the unorganised segment is likely to go up.

    And demonetisation is just the beginning.

    Accounting norms are likely to become clearer and stricter for all, and tax evasion will be more difficult. Meanwhile, India is expected to take further steps in the direction of a cashless economy.

    With GST close on the heels, the story of India, for listed small companies, has become better at the cost of the unorganised segment.

You see, demonetisation and the drive towards a cashless economy along with upcoming reforms could create a huge buying opportunity in small caps going forward. At Hidden Treasure at least, we certainly expect to keep beating the broader indices by a wide margin.

Data Source: Ace Equity

This Chart Of The Day was published in The 5 Minute WrapUp - This Equity Class Could Offer the Biggest Buying Opportunity in the Coming Times

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