When to walk out of your marriage with a stock?
(Apr 8, 2015)
|A A A
In this issue:
» Does the Nifty reflect slow earnings growth?
» Should the US Fed raise rates?
» Why El-Erian is almost entirely in cash...
» ...and more!
When Warren Buffett revealed in 2011, that Berkshire Hathaway had purchased a stake in IBM, considerable eyebrows were raised. After all, the legendary investor had, in his earlier letters to shareholders, quite clearly stated his reasons for not touching tech stocks.
Buffett is, of course, allowed to change his views. Indeed, he didn't buy railroad companies for a long time either. But then went on to invest in Burlington Northern Santa Fe (BNSF) in 2009, and this has so far worked well for him.
What interested us though was the reason why he chose to invest in IBM. According to him he had been studying the company for some time but what tipped the scale was the roadmap that IBM had laid out in its annual report for the 5 year period ending in 2015. The clarity expressed there about where the company was headed and what it was planning to do convinced him. A bit of research on the position that IBM held within IT departments of various Berkshire group companies also helped. Indeed, as reported in an article on The Street, as of December 2014, Berkshire had a 7.8% ownership stake in IBM and the latter ranked fourth in his portfolio in terms of weightage.
IBM, since then has struggled as it has been battling various headwinds, which have impacted earnings quite a bit. As a result of which the article has questioned whether Buffett has made a mistake in purchasing the stock in the first place.
We have not analysed IBM's performance to form a view whether Buffett has made the right decision or not. What matters to us is the process. Obviously, Buffett invested in the stock from a longer time frame perspective and a couple of tough quarters in that sense do not matter as long as the long term business fundamentals remain intact. And therein lies the crux. However, if there are signals emerging that IBM is abandoning its roadmap and doing something that Buffett does not like, then it makes sense for him to consider exiting the stock.
We have also had examples of stocks that we had recommended to our subscribers wherein the business models and the strategy laid out by the company management were very sound at the time. However, somewhere along the line, these very companies lost focus and made decisions that had no relevance to the core operations. And hence staying invested in these businesses made no sense.
Indeed, a couple of tough quarters should not bother investors too much. As long as the business model remains robust and the company management is strong, such companies will tide over the storm. But if the decline in performance highlights a bigger problem at hand or if the management makes decisions that render the reasons for buying the stock invalid, then investors should certainly consider exiting the same.
Will you exit a stock based on poor performance in a couple of quarters?
Let us know your comments or share your views in the Equitymaster Club.
--- Advertisement ---
Profits Could Be Easy... If You Invest In The Right Stocks!
Yes, profits could be potentially easy.
Ask our select group of subscribers who invest in our small cap picks.
They have made returns like 217% in 3 years and 11 months, 177% in around 2 years, 100% in 1 year 8 months and more from our recommended small caps.
And they did this...
Despite the fact that 'high potential' small caps are difficult to pin down...
Despite the fact that small caps require more diligent research...
And despite the fact that there are numerous details from returns to strategy and more to go through.
Simply put, they did it because for more than 7 years, Equitymaster's research team has been guiding subscribers like them to high potential small caps which could deliver big returns.
Now, we both know that every investment comes with an inherent risk...
However, we are confident that the WINNERS could more than make up for the losses we might incur.
So, with no further adieu...
We'd like to invite you to be part of this group too!
Click here for full details and act now!
One of the key reasons for the volatility amongst the broader markets in recent times has been the earnings growth not keeping up with expectations. With P/E valuations hovering around the frothy zone, the hopes have been high for an upsurge in profits ever since the new government has come into power. However, it turns out that the financial performance in the recent times has been quite dull. Today's chart of the day gives an indication of the combined financial performance over the past four quarters of the companies that are part of the Nifty index. As you can see, post June 2014, the slowdown has been very evident amongst India's largest businesses.
Nifty: Is the slow earnings growth priced in?
As per the Economic Times, the dull period is likely to continue for the quarter ended March 2015 given that there are no strong indications of a pickup in demand; and that things are likely to only pick up in the second half of the current fiscal year.
Having said that, what is likely to provide a strong fillip to the earnings growth is the overall pickup in capex cycle. Not to mention the declining interest rates as well. A combined impact of these aspects is likely to aid in the overall expansion in margins which have otherwise been at their lowest in nearly a decade. So has been the case with the asset turnover, while not at its worst levels over the past fifteen years, was at the lowest levels in recent years in FY14; an indicator of there being good scope of improvement in utilisation levels going ahead.
Nevertheless, with large amounts of earnings growth downgrading having been done in recent times, it would be interesting to see how the market will react to this earning season considering that this development is pretty much known to all; but seems that it is yet to reflect in the sentiments as gauged by the valuations.
When it comes to the US markets, the biggest question occupying the minds of investors is whether the Fed is going to raise interest rates or not. Goldman Sachs is of the view that the Fed should hold off on raising rates. This is because inflation won't reach the central bank's target in the next three years.
Will the US Fed pay heed? Nobody really knows. So far, according to us, what comes across is that the US Fed is quite clueless. Near zero interest rate policies and the massive stimulus measures have so far only inflated asset prices. And has hardly contributed to meaningful growth in the economy. Whatever recovery is visible then appears fragile. And if the Fed raises rates, this could send the economy deeper into a recession. If this happens, the central bank will again resort to loose policies. And so the vicious circle will continue.
Former CEO and co-Chief Investment Officer of PIMCO, Mohamed El-Erian was in the news recently on comments of him being almost entirely in cash. And what's his rationale behind the same? Well... it's pretty simple - everything is pretty much elevated.
Commenting on the Fed's stance on keeping interest rates low, Mr. Erian is of the view that the central bank may be doing so because it may feel obliged to do so. As such, prices are being artificially lifted with the ZIRP in place. What this would essentially do is make people 'feel' wealthy and in the process, they would start to consume more. And this would make companies invest more. However, given that there is a major gap between asset prices and fundamentals, he is simply staying away.
Mr. Erian also pointed out that the present times remind him of 2007-08 when investors were trying to time the market. With wild intra-day swings in US stocks, it seems that investors are simply betting on the Fed's low interest rate regime to be around for a while considering that the job situation is not going as desired.
With US stocks trading at their most expensive levels in nearly a century, we only endorse Mr. Erian's view considering that the risk reward ratio is seemingly skewed in favor of the former.
The Indian markets continued their upswing as the day progressed. At the time of writing, the BSE-Sensex was trading higher by about 200 points (0.7%). Barring banking stocks, gains were seen across the board led by stocks from the realty and information technology spaces.
"The stock market is a no-called-strike game. You don't have to swing at everything--you can wait for your pitch. The problem when you're a money manager is that your fans keep yelling, 'Swing, you bum!'" - Warren Buffett
|| Today's investing mantra
Today's Premium Edition|
Is it possible to identify 100-baggers in stock markets?
How to identify 100x baggers?
| Get Access
|This edition of The 5 Minute WrapUp is authored by Radhika Pandit.
|DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.
There are no outstanding litigations against the Company, it subsidiaries and its Directors.
GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.
DETAILS OF ASSOCIATES:
Details of Associates are available here.
DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
- Neither Equitymaster, Research Analyst or his/her relative have any financial interest in the subject company.
- Equitymaster's Associates has financial interest in the Hindustan Unilever.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
- Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
Definitions of Terms Used:
- The Research Analyst has not served as an officer, director or employee of the subject company.
- Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
- Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
- Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
- Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
- Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringementDisclosure & Disclaimer:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use
, available here. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407