How to identify a winner for your portfolio? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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How to identify a winner for your portfolio? 

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In this issue:
» Is it time to sell stocks?
» Which asset class has performed the best over last one year?
» Management lessons from Kingfisher's crisis
» Draghi sees US$1 trillion of stimulus in pipeline
» ...and more!


00:00
 
Multi-bagger stocks present asymmetric pay offs but identifying them requires unusual judgment. These opportunities could thrive right under your eyes but only investors with complimentary skill sets can identify them. One also needs to have the vision and clear understanding of the business to identify the opportunity before it blossoms out fully.

So, does that mean identifying multibaggers is out of reach of the average retail investor? Well, to be honest, if investors can identify stocks with the two basic characteristics which we are about to reveal they are on the right path. Though factors like management quality and balance sheet strength play a strong part in identifying a multi-bagger, having a unique business model and scalability are the most important factors in our view.

Monopolies are perfect examples of unique business models. Simply, because they cannot be replicated. They may have a strong brand or regulatory constraints that deter competition. Nestle or Fevicol are examples of strong brands creating a virtual monopoly. A monopoly draws customers towards it with low competition risk making the business infallible.

Scalability is another factor which is very important. It assures growth. Any factor which brings in a 20-25% kind of growth visibility for the next 4-5 years confirms that the business is scalable. Take the example of Titan Industries for instance. It sells watches and branded jewellery. India's rising urban middle class indicated a latent demand for its products presenting huge scalability. Minimal debt and competent management has indeed made the stock a multi-bagger over the years.

Now an investor cannot expect that each and every stock invested in will turn out to be a multi-bagger. However, the chances of spotting at least a few get enhanced ...when investors not just look at strong and scalable business but also some key Mega Trends. Coming back to the Titan example, the company was one of the biggest beneficiaries of India's growing middle class over the past decade. The fact that it recognized the potential of India's demographic dividend early on and tapped it with strong brands and excellent reach helped it create immense investor wealth. Rest assured, Titan was not a one off case. In fact there have been several Indian companies that have outshone their peers in terms of growth rates since 1991!

The research team at Equitymaster has been meeting some very interesting companies that offer us a glimpse of the Mega Trends that they are preparing for. And over the next decade they see these trends acting as tailwinds to their business growth. We shall reveal more details about these soon. Stay tuned...

Meanwhile do let us know if there are any trends that you are following to identify multibaggers for your portfolio... Let us know your comments or share your views in the Equitymaster Club.

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01:50
 
Flooded by cheap liquidity, stock markets have been constantly rising. And mind you, it is not just Indian stock markets we are talking about. Stock markets are making new highs across the globe. Take the US markets for instance. The benchmark stock indices have gone up nearly 3 times since their 2009 lows. The BSE-Sensex and NSE-Nifty have also been scaling new all-time highs.

And investors who may have seen double and triple-digit returns in a matter of months may be wondering if the markets have peaked. Also whether it's time to book profits before the markets come down crashing... Well, the problem is the most investors tend to focus too much on short term price movements. If you have made a long term real estate investment, would you go around looking for price fluctuations every hour? No way! There no price tickers in real estate. Say if you have invested in a business, would you keep thinking when to sell it. The thing with stock markets is that the price information and the opportunity to jump in and out of investments is at our disposal every day and every single minute of the trading session. So investors pay too much attention to volatility.

Coming back to the main question: Is this the time to sell stocks? Firstly, there can be no blanket answer for all stocks. There are two key factors you should consider while making a selling decision. First one is business fundamentals. Sell the stock if you think the long term fundamentals of the business are poor or deteriorating. If the businesses have strong long term fundamentals and a solid economic moat, then you should not worry too much about when to sell. The second factor is valuations. If you think the stock is trading at insanely high valuations, then maybe you could consider booking profits. But do not try to time the market. Most investors try to do that and fail all the time.

02:25  Chart of the day
 
The last twelve months have been exceptional for the Indian stock markets. Not only have the benchmark indices scaled life highs, the broader market comprising mid and small caps has done very well for itself. As today's chart clearly shows, equities have been the place to be over the last one year. Returns from all other asset classes look quite puny compared to the returns from stocks over the last year. Even Gold seems to have lost its luster.

Does this mean that investors should jump on to the bandwagon and enter the markets now? We believe that it would be a very poor decision to abandon the principles of asset allocation and jump headlong into equities based on one year returns. Investment in equities should always be made for the long term, in companies with sound fundamentals. Also, one must always keep the valuations in mind before investing in stocks. We also believe that investors should hold about 5-10% of their assets in Gold at all times. The yellow metal is an effective portfolio diversifier and provides a good long-term hedge against inflation.

Is the time ripe to move to equities?
^Cash = Savings Bank account; #Debt = 10 year G sec yield; $Equity= S&P Nifty


02:45
 
Like in the case of Satyam Computers, Kingfisher Airlines has become a case study of everything investors should avoid and businesses should stay away from. The poor fundamentals, lack of business discipline and ethics, disregard for minority shareholders and eventual hard landing. Each and every aspect that led to Satyam's fall from grace has been witnessed in the case of Kingfisher has well. Just that in the case of the latter, the management is yet to bite the dust. According to an article in Firstbiz, the promoter of Kingfisher Airlines has made just one cardinal mistake. That of not disassociating his larger than life and flamboyant lifestyle with that of the aviation company. Also using the aviation business as a means of advertising for the spirits business was not a well thought out move. We do agree to this. But the Kingfisher management did not just disregard the business dynamics of the aviation company. It also misused the Kingfisher brand to raise funds and wilfully defaulted on them. In fact, according to us, the management's callous attitude towards the Rs 70 bn of loans that it owes to 17 banks itself smacks of poor business ethics. We can only hope that such managements are brought to book so as to set a strong precedent. Having said that, investors should not touch poor managed companies even with a ten foot pole.

03:10
 
In its latest attempt to boost economic activity in the European region, the President of the Euro Central Bank (ECB), Mario Draghi, has announced new measures. This includes its own version of the QE program, something other developed nations such as US and Japan resorted to; to provide a fillip to their respective economies. This development seems to have come at a time when the central bank does not have many monetary policy options; given that interest rates stand at 0.05% (benchmark rate) after being reduced by ten basis points. Deposit rates stand at minus 0.2%, indicating that the spending is being encouraged.

In the attempt to boost the economy and push in more capital in the system, the central bank is as such looking to purchase bonds of about 700 bn Euros or US$ 906 bn. However, as reported by Bloomberg, a full-fledged QE plan was not announced given the split in views amongst the members of the Governing Council. Nevertheless, what this could possibly mean is over time, such capital could find its way to chasing higher returns. What is concerning is that this would add to the already existing bubble scenarios that are being witnessed in various parts of the world.

03:45
 
Global markets ended the week on a steady note followed by key positive developments during the week. The US markets remained buoyant as the weaker than expected jobs data receded the worries of rise in interest rates. Major indices across globe remained positive.

Opting for unconventional monetary policy measures, the European Central Bank (ECB) surprised the markets by reducing all three of its main interest rates. The ECB monetary policy decision was a welcome step for the European economy. Even The Bank of England on Thursday, 4 September 2014, left its bank rate unchanged. This in turn helped boost the European markets, with economic powerhouse Germany topping the pack of winners.

Eased global monetary policies have helped spark a surge of funds into emerging markets. In Asia, most markets ended the week on a strong note with China followed by Japan and India leading the pack of gainers. The buoyancy in Indian markets continued with the Indian benchmark index closing higher by 1.5% up for the week gone by.

Going forward the global economic data and the central bank stance across globe will decide the further jitters in the market. Weak global cues and an overnight rally in Brent crude oil prices have already weighed down the Indian indices towards the end of the week gone by. Therefore, the world and the domestic markets are expected to remain choppy for the week to come. That said, we recommend investors to exercise caution and do not get carried away by short term gyrations. Instead focus on the cherry-picking of value stocks so as to build-up a resilient investment portfolio.

Performance during the week ended September 05, 2014
Data Source: Yahoo Finance


04:50  Weekend investing mantra
"A public-opinion poll is no substitute for thought". - Warren Buffett
Today being a Saturday, there is no Premium edition being published. But you can always read our most recent issue here...
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4 Responses to "How to identify a winner for your portfolio?"

Vamsi

Sep 7, 2014

Next big trend is gonna be logistics. I feel dhl & gati are gonna make it big.

Like 

debatosh mitra

Sep 6, 2014

Good and informative

Like 

Krishna Murthy

Sep 6, 2014

We have only handfull of truth full advisors than the untruth full reporters. Number of truthfull reporters are very few in comparison to untruth full corporates.

Like (1)

Gopalan

Sep 6, 2014

Megatrends which I can think of off-the-cuff are A. VATECH WABAG - water mgmt experts: could benefit a lot by future Govt initiatives;also appear zero-debt Co. B. PAGE INDUSTRIES - No competition in premium innerware - i )seems to have used ups and downs in cotton pricing to great advantage ii) despite family controlled mgmt must be forced to follow best accounting practice by US based Parent. iii)Great Brand. C. Eicher Motors - still seems to have a lot of steam left, places to go i) Mercedes has still not put any credible competition to Volvo business segment after a lot of hype. ii) 'Enfield' motorcycles seem to have created a niche among aspirational and discerning customers and surely co. pricing must be premium with high GM.
Thanks for the oppurtunity to present my views.

Like (1)
  
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