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Did your stocks perform well in the June quarter?

Aug 11, 2015

In this issue:
» Buffett makes the biggest bet of his career
» The Indian power sector has a long way to go...
» China devalues the Yuan!
» ...and more!

Did the title of today's The 5 Minute WrapUp surprise you?

Don't worry. We're not going to do a boring quarterly result analysis here! Your mailbox would have been flooded with such analysis over the last one month. But think about this for a minute. Do you really find such reports from your broker very useful?

Wouldn't it be better if you received research reports with long term buy/sell calls backed up with solid fundamental analysis? That way, you need not bother too much about how your stocks have performed every quarter.

Now don't get us wrong! We don't have any problems providing quarterly analysis. Our concern is slightly different. Quarterly reporting does have its merits. For example, it encourages transparency and provides regular data by which companies can be tracked.

But it also has its drawbacks. The biggest one is something that sadly, most retail investors do not think about.

We are talking about focus of the management.

You see in the long run, you can only earn as much returns from stocks as the returns from the underlying businesses. So if you are a long term investor, you should be totally sure that the people running the business are thinking the same way. Managements that make good long term business decisions don't chase short term growth. This is where the quarterly results season can get in the way.

The results season puts CEOs under huge pressure to 'make the numbers'. If the company beats street expectations, the stock takes off like a rocket. Analysts hail the management and claim the stock is the next multi-bagger! On the other hand, if the company misses analyst's forecasts by even a small amount, the stock is trashed. Reports come out providing 'research' about why the company is doomed! In such a situation, it is very tempting for managements to 'make up' the numbers rather than 'make' the numbers.

Just look at what happened when Infosys declared its June quarter results last month. The stock which is usually not very volatile was up 10% that day. Thus, it was a pleasant surprise to read what the CEO Vishal Sikka had to say about quarterly results in his blog recently. "The 90-day cycle, an imposition largely constructed by public markets around the world, seems to defy any meaningful purpose. Indeed, arguably, focus on 90-day performance, can often distract us from longer-term progress".

How we wish every CEO felt the same way.

As advocates of long term value investing, we at Equitymaster place a lot of importance on this aspect. As Benjamin Graham the father of Value Investing, once said: "Investing is most intelligent when it is most businesslike". If the management seems worried about short term targets, instead of focusing on long term business growth, we would not be comfortable recommending the stock. We believe retail investors would do themselves a world of good if they paid more attention to this aspect of investing.

Do you agree that quarterly results are not meaningful for long term investors? Let us know your comments or share your views in the Equitymaster Club.

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The Oracle of Omaha is in the news again. And this time for the biggest bet of his career! Berkshire Hathaway has invested a massive sum of over US$ 32 bn (over Rs 2 trillion) in Precision Castparts Corp (PCC), a supplier of parts such as nuts, bolts, and other fittings to the aerospace industry.

Warren Buffett has nevertheless found some criticism for this deal. Considering that PCC's last year's profit stood at US$ 1.53 bn, it implies a multiple of 21.2 times. When using forward estimates, the multiple stands at about 19x. As Buffett himself acknowledged, this price was a "very high" multiple for him. This deal however is clearly a bet on the future of the airline industry, considering 70% of PCC's business comes for catering to the aerospace industry, with the balance focused on the energy sector.

Also, it seems that PCC's recent financial performance has not met investors' expectations, as the stock is down by about 20% in the current year and about 40% from its peak of last year. As reported, the company posted lackluster results for the past year; in the latest quarter, net income was down by 18% YoY.

Notwithstanding whether Buffett gets his call right or not over the long term, it just is an indication as to why investors should not be perpetrated by short term financial performances and rather keep an eye out for the long term.

 Chart of the day
India's energy consumption is on the rise. And within this space, there have been some major trends occurring - within both, the rural and urban parts of the country. But the fact of the matter remains that there is a stark difference in the energy sources between the two regions.

In terms of energy sources for cooking, LPG forms a 15% share in the rural parts of the country. Around the millennium, this source had a share of only 5% for cooking application. Firewood or wood chips nevertheless still continue to be the largest form of energy for cooking - with a share of about 67%. The same has however, declined from 75% in 2000. Further, around 10% of the rural population still uses dung cakes.

In urban parts of the country, 68% of the energy source is LPG, while 14% of the households use firewood, which has the second higher share.

When it comes to lighting, the Ministry of Statistics has reported that electricity has a share of 73% in the rural lighting sources followed by kerosene which formed majority of the balance. In urban parts of the country, the former has a share of 96%.

Electricity penetration has moved high over time. As reported by Business Standard - "Over the last two decades, electricity has clearly replaced kerosene as the primary source of lighting in both rural and urban areas. While 62% of households used kerosene in rural India in 1993-94, the figure has dropped to 26%.

The use of electricity as a source of lighting has improved from 83% in urban households in 1993-94 to 96% in 2011-12."

Having said that, it seems that India's power story still has a long way to go; when compared to peers, the country's per capita consumption is minimal. Today's chart of the day gives an idea of the per capita power consumption amongst the BRICS nations. India's figure of 917 kwh is minute, when compared to the 4,867 and 7,425 kwh figures of South Africa and China respectively.

Are Indians big consumers of electricity?

While the power sector may seem to be in the doldrums at the moment, the fact of the matter is that this is an industry that is not going to disappear. And considering that valuations of some of the best players in the industry are at their multi-year lows, it does make things all the more interesting.

The big international economic story of the day was China's move to devalue the Yuan. We can't say that we are surprised. After all, this is an age old tradition to boost exports when times are bad. On the face of it, the 2% devaluation (against the US dollar) by the Chinese central bank doesn't seem like much. But rest assured it is quite significant. If any more proof was needed the Chinese economy was floundering, you need to look no further. The export driven economy is struggling in the face of global deflation. Exports in July 2015 were down 8.3%. We don't believe this move will solve the problem. Apart from complicating the issue of making the Yuan more acceptable in the global markets, this move will only pressurize exports from other countries.

A last word on real estate prices. Vivek Kaul, our colleague at Daily Reckoning, has recently published a new report where he takes a view that "real estate prices are headed down". We strongly recommend you read that report for it contains some of Vivek's best writings on real estate. To claim the report and get Vivek's Daily Reckoning issues where he continues to share updates on Real Estate among other things, just click here... (it's a one click sign up).

In the meanwhile, Indian stock markets were trading weak, with the benchmark index, the BSE-Sensex, trading lower by 162 points or 0.6% at the time of writing. Mid and smallcaps were less favoured today as well with their respective indices trading lower by 0.6% and 0.9% respectively. Amongst the sectoral indices, IT stocks were in favour today, while metal and engineering stocks were under pressure.

  Today's investing mantra
"The list of qualities (an investor ought to have) include patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic." - Peter Lynch.

This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst).

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Equitymaster requests your view! Post a comment on "Did your stocks perform well in the June quarter?". Click here!

1 Responses to "Did your stocks perform well in the June quarter?"

Rakesh Verma

Aug 11, 2015

I am a very small invester.There is no losses in June 2015.More over i have wide range sectoral divisions.

Equitymaster requests your view! Post a comment on "Did your stocks perform well in the June quarter?". Click here!
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