This Equity Class Could Offer the Biggest Buying Opportunity in the Coming Times - The 5 Minute WrapUp by Equitymaster
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This Equity Class Could Offer the Biggest Buying Opportunity in the Coming Times

Jan 7, 2017
In this issue:
» Better opportunities ahead in small cap space
» Fight against black money gets a big boost
» Cash ban hurts India's growth and economy
» Global market roundup
» ...and more!

00:00 Chart of the Day

Richa Agarwal, Research analyst

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.
An IRR comparison for Hidden Treasure, Small cap index and Sensex


Note*: For Hidden Treasure recommendations, audited data as on 31 Dec 2015 has been taken.
The period considered is from February 2008 (first Hidden Treasure recommendation) to 31 December 2015 (last audited).
Small cap and Sensex data has not been audited by external auditor.

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 3,400%. 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 most of the 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.

03:00

While demonetization could be positive for small caps, as an economic experiment, it might be the biggest failure. As my colleague Ankit Shah wrote recently, 97% of the Rs 500 and Rs 1,000 notes in circulation until 8 November have returned to the banks. Further, all this noise against black money, has failed to target the very root - electoral corruption.

And the actual impact on economy is yet to be assessed. As per the data released by the Indian Central Statistics, India's economic will grow 7.1 percent in the year through March. That compares to last year's 7.6 percent.

But here is even more disappointing part. The 7.1% growth estimate does not consider the data from November onward when Mr Modi banned Rs 500 and Rs 1000 notes. This projection is likely to get revised further downwards once the full impact of demonetization kicks in.

The government may want you believe that it is a temporary phenomenon.

But here are some facts: The biggest blow due to demonetisation has been dealt to the rural economy and the small players in the unorganised sector. One must note that informal sector runs mostly on cash and accounts for 48% of India's total output and 80% of employment. We believe that a huge part of the damage due to unplanned cashless drive and demonetisation could be irreversible.

03:30

By the way, we are really pleased to announce that over 25,000 citizens have signed a petition by Vivek Kaul to end special privileges to political parties. Congratulations for taking this significant step to fight for equality. And thank you for helping make change happen. For updates, sign up for Vivek Kaul's free newsletter.

03:50

Global markets started 2017 on a positive note. The DJI came tantalisingly close to exceeding the 20,000 milestone. This was on the back of December jobs report, which showed that the economy added 156,000 jobs in December and average hourly earnings grew 2.9% over the past year, the fastest annual increase since 2009. While the Federal Reserve will watch for other signs of improvement as well, this report supports the committee's view that the economy can handle two to three short-term interest rate increases in 2017 as inflationary pressures rise headed into the new year. The DJI Index was up by 1% for the week gone by.

The data on the UK's services industries also attracted much market attention when released on Thursday. The readings showed that Britain's economy finished 2016 strongly, growing at the fastest rate since mid-2015. This was despite the fact that some companies faced the rise in cost due to weakening of sterling post Brexit. The UK stock market was up by 0.9% for the week gone by.

The German Purchasing Managers' Index (PMI) for manufacturing rose to 55.6 from 54.3 in November. This was seen as its highest level in 35 months. The uptrend here was driven by rising demand from Asia and the US Data showed that manufacturers in Germany raised their output at a quicker pace. Another set of data for Germany showed that inflationary pressures increased in December. German Inflation jumped closed to ECB's target of 2%, hitting the highest level in more than three years. The ECB has been pouring money into the euro zone economy in an attempt to boost inflation from a near-deflationary level. However, the strong inflation data will lead ECB to reserve the stimulus. The stock market in Germany was up by 1% for the week gone by.

China's foreign exchange reserves fell for a sixth straight month in December to the lowest since early 2011. The yuan depreciated 6.6% against the surging dollar in 2016, its biggest one-year loss since 1994, and it is expected to weaken further this year despite authorities' aggressive attempts to slow its descent this week. The stock market in China was up by 1.6% for the week gone by.

Back home, the markets managed to finish the first week of the calendar year 2017 marginally higher. The BSE-Sensex ended on a positive note and was up marginally by 0.5%. This was on the back of continuous buying by domestic institutional investors (DIIs) even as an inconclusive Goods and Services Tax (GST) meet, hawkish minutes of meeting from the US Federal Reserve, fall in manufacturing activity in December and H1B visa woes kept the momentum shaky through the week.

Performance During the Week Ended 06th January, 2017

04:55 Weekend's Investing Mantra

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Richa Agarwal (Research Analyst).

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4 Responses to "This Equity Class Could Offer the Biggest Buying Opportunity in the Coming Times"

raj kaoior choraria

Jan 11, 2017

Pleas send me your demo recomended stokecto follow in equity market and be a party client in present..I have very short time in hand ....Rkc.

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P K SAGAR

Jan 10, 2017

As others have expressed in this column the persistent criticism of demonetization by equitymaster leads me to believe that your criticism is highly motivated. Your claims of a disinterested assessment of such issues is highly questionable. When you take on such an egregious problem of such gigantic proportions we are bound to face many sticky issues. However they are much smaller than the problem they have set out to tackle. This has been recognized by all common people like us and even the small people in the society are appreciating the move prepared to accept that it may not succeed. No one can understand this problem better than me , being a part time farmer. We don't need these crocodile like tears from you.Hardly has he started on this most dreaded and the oldest problem prevalent in this part of the world, that people like you have started citing so many more problems for example the much touted fight against political and electoral corruptions.All can not be attacked in one go because we do not have the wherewithal. Further don't behave as if you are the pioneering crusaders for fighting against such form of corruption. If so why you people had never before talked of this issue with as much frenzy as you are showing now. Hardly has the PM raised the issue of accountability of finances of political parties that they are going for his throat. Why are you not questioning the likes of Mamata Banerjee and Mayawati( who are sitting with tons of dirty and ill gotten money) who are likening Modi to Tuglak. Apparently your symparthies are with them. Come on grow up and behave more responsibly.

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Hari

Jan 8, 2017

Though many of Richa's views are reasonable the strong view expressed in this article against demonetisation appears to be frivolous and based on biased data. That the whole operation was botched up by RBI is undeniable. So also is the fact that the entire criminal wheel lurched to a halt as the lubricant - cash - ran dry. The poor of India will survive , no doubt and they don't need the crocodile tears of the so called informed in the press. At least we have one politician in India who is trying to clean up the sewer that is our political system. Let us encourage him instead of trying to justify our wisdom through GDP growth, as if a few percentage points mattered. The press all over the world has lost its credibility and your views no longer matter as eminently proved by Trump in the US who has coined an apt name for this profession

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V S Agarwal

Jan 7, 2017

As I recall your very first recommendation was Parekh aluminex. The price today is zero..

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