A System That Scours the Microcap Universe for Multi-Baggers

Jun 30, 2016

In this issue:
» Top large cap performers in the first half of 2016
» The reason for the high asset valuations that we see all around
» ...and more!
Rahul Shah, Co-Head of Research

Some of you may have gotten my invitation to join Microcap Millionaires (MCM). Let me tell you, I've been pleased to send these out to you, and even more delighted that many of you have grabbed this window of opportunity.

Here's what excites me.

MCM is an exclusive monthly stock recommendation service I designed to give investors access to sub-niche stocks with great money-making potential. I scour the microcap universe to zero in on stocks with the best chances to turn into multi-baggers in a mere one-to-two years.

I'm a self-confessed Benjamin Graham fan, and I've built this service around key elements of Graham's market-beating approach. It's not only simple to implement, but mightily effective too. The goal is for subscribers to compound their money at 20-25% per annum with minimal risk.

I have received many questions from you on various facets of this service. I've individually addressed all the queries. However, I thought it would be great to share some of them here for everyone's benefit.

So here's goes...

Mr Ramanujam asked about why some stocks recommended in this service do not qualify for the 'microcap' tag.

In response, I emphasised a very basic feature of the service. The service has not been named so because the team in charge of it searches only for 'microcaps' to the exclusion of everything else. Its pursuit is more to do with recommending a diversified set of stocks that end up trading very cheap in the markets from time to time. What I realised early on is that, quite frequently, many of these stocks end up being from the so-called 'microcap' category. And that's why I named the service so. Stocks from other categories, however, will belong as much to this portfolio as any else. As long as they meet our well-defined criteria that is.

Our primary emphasis is on opportunities that suit Benjamin Graham's philosophy and recommendations. Nevertheless, stocks of larger market caps will always be the exception rather than the norm.

We recommend multiple stocks as part the MCM portfolio. Mr Rathod wrote in requesting that we identify a few of them that have potential to move faster than the others.

But here's the thing. All the stocks recommended through MCM are essentially turnaround stocks that we think have the business model and balance sheet strength to script a turnaround. Therefore, all we can do is find out whether these stocks have the potential to turn around and what factors will be needed for this to happen. Exactly which stocks, and when they will turn around is anybody's guess. As a result, asking you to buy only a few stocks will be a risky strategy as we can't say with a high degree of certainty whether these are the ones that will indeed turn around.

We therefore ask our subscribers to distribute their investments across all our open positions so that even if some stocks don't turn around, the gains in the others will more than make up for any losses. We also ask subscribers to follow the allocation between stocks and bonds as prescribed.

Then Mr Devi asked us why sometimes no new companies are recommended for multiple months at a time.

The way this service works, the recommendations likely won't be staggered but will mostly come in bunches.

For example, it's been 28 months since the launch of the service, and so far, we have made around 34 recommendations. That's an average of well over one recommendation per month. The thing is at times we recommended them in bunches rather than staggering them out each month.

Going forward, we are quite certain we will be able to recommend at least eight-to-ten stocks per year. What we cannot guarantee, however, are regular monthly recommendations. We might not recommend any stocks for a few months straight and then recommend five-to-six stocks all at once. And this arrangement is so with only one objective in mind - to ensure maximum long-term returns for our subscribers as per the MCM strategy. So we ask subscribers to do what is appropriate when it is appropriate, which may not always be merely when thirty days are up.

We sold one of our stocks at a 106% gain. Mr Dubey was quick to point out to us that the stock more than doubled since our 'sell' call. 'Is it really prudent to sell a stock when it is clearly on an uptrend?' he asked.

While we do look to let our profits run in Microcap Millionaires (MCM), we would only do so if the stock's price continues to reflect its full value - even if that means going beyond one of our stated sell criteria of 50-100% gains.

At MCM, we do not attempt to ride the momentum or trend in stock prices. We know we cannot predict stock prices, and we believe up and down trends look clearer in hindsight. As soon as we think the price-value gap has disappeared in the market, we exit. Period.

So those were some excerpts from my correspondences with MCM subscribers who wanted to know more about various facets of the service. I hope it has given you, too, better perspective on this unique service.

As of yesterday, money invested as per the recommendations of this service (since its inception in February 2014) would have gained 94.5% in value. The BSE Sensex has gained 30.2% during this same period, which takes this service's returns to more than thrice the benchmark's.

As I continue to guide MCM subscribers through many more years of wealth creation, I welcome you who have recently subscribed to the service.

If you have any more queries about MCM, you can write in to me.

03:18 Chart of the day

What do you think is common between stocks like Central Bank, Cholamandalam Investment & Finance and Yes Bank? Yes, all of them belong to the banking and finance space. However, there's one more commonality. As today's chart of the day highlights, all three are amongst the top performing stocks from the BSE 200 universe over the past six months. With the first half of 2016 almost coming to an end, we thought it would be a good idea to see which amongst the bluest of blue chips in India have done the best. The 45-50% returns the top five have notched up during the period is a far cry from the mere 2% gains recorded by the benchmark index. Further, nearly half of all the stocks in the index have done better than the index.

Given the strong performance of stocks in the banking and finance space, can investors continue to expect them to give great returns going forward? Well, as bottom up stock investors, we don't believe in taking a sector based to investments. Even if the underlying growth looks promising, due consideration should be given to the valuations the sector stocks are trading at. And if the risk reward does look favorable from a medium to long term perspective, the stock should be invested into irrespective of whether it has underperformed or outperformed its benchmark index.

Best Performers in BSE-200 Index in First Half of 2016


Does the name Satyajit Das ring a bell? He is an internationally respected commentator on financial markets and with whom Vivek Kaul, our colleague and the editor of Vivek Kaul's Diary, had conducted a series of interviews that were very well received.

So, what's on Satyajit's mind these days? Well, he remains as sceptical as ever and has painted a scary picture of the financial world we live in. Writing in the Forbes magazine, he has argued that the world continues to remain awash in debt and the high asset valuations that we see all around us are nothing but a function of more and more debt finding its way into the markets. Well, we certainly won't disagree with his point of view. In fact, a lot of our writing in recent times has pointed towards the same thing.

However, does this imply that one should sell everything and run for the hills? We don't think so. We are of the view that by investing in companies that will be creating new profit records 10 years from now at sensible valuations will ensure that you sidestep any crises with minimum damage. The coming crisis could well be the biggest of all times but it is also true that India's best days still lie ahead of us.


Meanwhile, Indian stocks were trading strong today with the Sensex up by more than 150 points at the time of writing. Nifty was seen trading up by 50 points. BSE Mid and Small Cap indices were also strong and were up around 0.8% each. Amongst sectoral indices, realty and consumer durables were seen attracting the maximum buyer interest.

04:56Investment mantra of the day

"In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion." - Benjamin Graham

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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Feb 10, 2017

send me the midcap report,

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