3 Reasons Why I Believe This Company Can Make It Big!

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I'm going to name eight stocks. Think about them for a minute.

Then I'll ask you a question...

Page Industries

HDFC Bank

Eicher Motors

MRF Limited

Hindustan Unilever

Facebook

Amazon

Google

Okay, now here's the question... What do they all have in common?

The short answer... They are all multibaggers.

Take Page Industries for example.

If an investor had bought shares worth Rs 1 Lakh in March 2007, those shares would be worth Rs 1 Crore today! The stock is up 100 times since listing.

But there's another thing they have in common.

They are all consumer-facing companies.

By consumer-facing, I mean people buy or use these companies' products or services directly. The history of multibaggers is full of such consumer-facing companies.

Why is that so?

Well, such companies have three big advantages. Let me list them down for you...

1. They can charge the price they want - Let's see how this works. Take Eicher Motors for example.

   It sells Royal Enfield bikes. That is a very strong brand. Those who want to buy a Royal Enfield Classic 350 don't really care if its price is Rs 1.4 Lakh or Rs 1.5 Lakh. It all the same to them.

   But Rs 1.5 Lakh is 7.1% more than Rs 1.4 Lakh. This means Eicher Motor can sell the same number of bikes and increase its revenue by 7.1%.

   Now, keep in mind that its costs to produce those bikes have not increased. This means the company's profits (revenue - cost) will go up more than 7.1%.

   This is called pricing power. It is the single biggest reason why only a few stocks become multibaggers. That's because only a few companies have the kind of pricing power that Eicher Motors does.

2. They don't have to invest a lot of money in plant and machinery - Just look at HUL. What does it manufacture? Nothing. It outsources all the manufacturing.

   Soap, detergent, shampoo, deodorant, etc. HUL doesn't have to spend money importing costly machinery to make these products. In other words, HUL doesn't need to invest in 'assets'.

   Thus, HUL saves a lot of money by not having to spend it in the first place. It pays out this cash as dividends to shareholders. We call this an asset-light business.

3. They don't have a lot of working capital requirement - Working capital is basically money that a business needs to 'keep the lights on' i.e. for its day-to-day operations.

   Imagine you are running a company that is supplying auto parts to Maruti. You have no power over Maruti's executives. They can squeeze your business if they want to. They can ask you to cut your prices. In that case, your working capital needs will go up.

   But what if you were running Maruti instead? Imagine having the power to squeeze your suppliers! My colleague Girish Shetty wrote an excellent piece about companies with this kind of power - These Are the Best Stocks for the Next Decade.

Consumer-facing companies have some more advantages but I think these are the biggest three. You can see these advantages reflected in their financial statements. The numbers are rock-solid.

Why I am telling you this today?

Well, all this exactly describes a stock that Smart Money Secrets recommended last year.

The stock has recently corrected (however, has posted a stellar results in first quarter of the financial year) and is currently a Buy.

This company started its journey as a supplier to large consumer-facing companies. Those companies used to squeeze its margins and put a lid its pricing power.

Not anymore!

In 2012, the management decided to create their own brand and changed the business model into a consumer-facing one.

And I am happy to tell you, they did it successfully. Today around 40% of its revenue comes from the consumer facing business.

In this new Avatar, it is now foraying into exports as well. I believe, will lead to even higher profits.

I see an upside of 71% in the stock from current levels.

This is one of my favourite stocks that I have recommended to my Smart Money Secrets's Subscribers.

Chart of the Day

I've always been on the lookout for the best gurus of the market. I believe following them makes a lot of sense because they do most of the hard work for you.

If they buy stocks of quality companies run by ethical managements, you should consider them too.

If the stocks fall, you should be inclined to buy some more.

Corrections happen all the time. It will affect your portfolio in short run but you will be better off in the long run with top quality stocks.

Look at this chart. These are times when India's smartest super investors are facing the heat.

Even Super Investors Are Facing the Heat

Most of the super investors have underperformed the Sensex so far, this year.

Does this mean they have messed up?

No!

These super investors have seen many market cycles and have faced these kinds of losses many times.

The only difference between them and the aam investor? They hold on to their quality stocks and even add more.

Therefore, they outperform the markets in long run.

The Smart Money Secrets team not only pick great investment ideas of these super investors, it also tries to understand the behavioural aspect of investing from these investors.

Regards,

Kunal Thanvi (Research Analyst)
Editor, Smart Money Secrets

PS: Dear reader, click here to claim your virtually free copy of Equitymaster's Secrets: 2018 Limited Edition This book, which includes a special message from Tanushree Banerjee, editor of The 5 Minute WrapUp, will be available only till stocks last! Claim your copy now!

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