'These Companies Are Rotten - Save Your Stocks Now!' - Disappointment Panda - The 5 Minute WrapUp by Equitymaster
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'These Companies Are Rotten - Save Your Stocks Now!' - Disappointment Panda

Jul 6, 2018

Kunal Thanvi, Research analyst

For several weeks now, I have been writing to you about the turbulence in the mid and small cap space.

I mean, all of a sudden, auditors were resigning or unwilling to get re-appointed.

For the first time in the history of the Indian share markets auditors have resigned in bulk and I believe there are many more to come.

And giving everybody this bad news makes me feel like 'Disappointment Panda'.

I am reading a superb book by Mark Manson called 'The Subtle Art of Not Giving a F*ck'. I recommend you give it a read when you get a chance as well.

Manson talks about a fictional super hero he calls 'Disappointment Panda'. The panda's super power is telling the ugliest truths, which are unpleasant to hear.

Meet My Friend - Disappointment Panda

Manson believes the most important truths of life are the most unpleasant to hear.

I believe the same is true in investing.

In a bull market with virtually everything going up, investors tend to invest in all kind of companies, forgetting about: corporate governance, financial reporting, management quality etc.

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This happens in every bull market.

And when investors are high on every kind of investing, all of a sudden, a Disappointment Panda appears.

The Panda comes in different shapes and sizes - he may come as Lehman Brothers, as the great Depression, as Vakrangee or any number of fraud companies.

But no matter what avatar he takes, he brings the real picture out.

And when he does, both institutional and retail investors are caught on the wrong side.

And this time he has come as a gatekeeper of 'Corporate Governance'.

He is visiting companies with questionable corporate governance and financial reporting.

And once he visits them, we see auditors resigning and past frauds being caught out.

The Panda is also visiting your portfolios.

As he announces his ugly truths, your stocks go down 50 to 60% from their highs.

When Panda tells you about the bad quality companies you own, you have a choice either to ignore him and buy more or face the harsh truth and act.

Well, trust me on this, we are in middle of the next big revolution in the Indian share markets, i.e. upliftment of corporate governance standards.

I strongly believe, in the years to come, it will be very difficult to play around with account books - something that is too common right now.

We at Smart Money Secrets, have always tried to take care of corporate governance and that was the reason we designed our own proprietary tool, the Smart Money Score, which helps us avoid some of the obvious manipulations in the books of accounts.

For us, investing is about quality and we are very skeptical about companies with shady track records.

We believe, this is the time to re-look at portfolios and stick to quality companies with world class managements and corporate governance.

And get rid of companies with questionable corporate governance.

But if you see quality companies correcting due to the extended fear - don't mistake that with Disappointment Panda and buy them.

Disappointment Panda is doing his job of telling the ruthless truth, you have the choice to either hear him out and save yours stocks or ignore him - that mistake is yours to avoid.

Happy Quality Investing!

Chart of the Day

Talking about the Disappointment Panda in its current avatar of gatekeeping the corporate governance, the need of the hour is to stick to quality companies.

While the Disappointment Panda comes once in a while. We, at Smart Money Secrets, always try to recommend companies which are not susceptible to Disappointment Panda.

We believe, investing in quality companies (honest and efficient management along with strong business) in long run will help us fighting all kind of pandas and bears.

Sarvajeet wrote to you about one of the quality company we recently met. This company has not only got superior management, it has created a very niche business.

It is the lowest cost producer in the industry it operates. In fact, it's in-house R&D has helped in creating a competitive advantage over other players in the global industry.

And one of the metrics to look at quality in a business model is, growth in profits and its correlation with cash flow generation.

When Disappointment Panda is Around. Buy Quality Stock like This!

As we can see in the above chart, the company has over the years grown its profits way higher than its sales and the growth in profit is also being translated in the cash flows.

If we look at companies operating cash flow to net profits ratio for last ten years, it stood at 2.24 times on an average. Which we believe, shows the robustness of the business model and helps it qualify our quality filters.

While we like this company a lot, but we are travelling the time to see long history of company to be extra sure about its business model and competitive advantage it enjoys.

Stay Tuned.

Happy Quality Investing.

Regards,

Kunal Thanvi
Kunal Thanvi (Research Analyst)
Editor, Smart Money Secrets

PS: Kunal is the Sherlock Holmes of investing - he discovers rotten companies and kicks them out of his portfolio like criminals. For good, clean stocks that won't put your wealth in peril, subscribe for Kunal's recommendation service.

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1 Responses to "'These Companies Are Rotten - Save Your Stocks Now!' - Disappointment Panda"

Harish Priyani

Jul 7, 2018

Is this Operating Cash flow before Working Capital Changes or after Working Capital Changes ?

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