State of the Market, Microcap Millionaires Is Far from Done, and More... - Views on News from Equitymaster

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The Equitymaster Research Digest

State of the Market, Microcap Millionaires Is Far from Done, and More...
Mar 8, 2016

Whether you call it a swing or a see-saw, markets have indeed been volatile pre and post the Union budget.

Investors hoping to time the market have had a tough go this past month. Which is exactly why we don't even try to time the market.

Since you're reading the Research Digest, you probably already know that we look to invest in stocks that are:

  1. Cheap
  2. Hated
  3. At the start of an uptrend in fundamentals

We always want you to invest in stocks that are good values...that most investors aren't interested in...and that have a fundamental price catalyst (meaning earnings or the business model are set to improve).

That's the ideal setup for a stock price to go up. If you see the opposite setup, then you have a recipe for lower stock prices.

We look at both the earnings trend AND the valuations to determine the best time to buy stocks cheap and sell them for profit.

The simplest way find the best opportunities and tide volatility is to keep the image below in mind at all times. Picture it every time the market confuses you. Or even better, keep a printout at your desk...

State of the Market

Equitymaster Mailbag - Are We Analysts or Investigative Journalists?

Subscribers often ask us to investigate if the rumours a company cooks its books are true.

We appreciate their concern. Stocks of little-known companies, particularly small caps, react sharply to such news, even it's a rumour. Most investors dump the stocks, as the managements are considered guilty until proven innocent.

We are with you and strive to do everything within our means to avoid shady companies.

Precisely for this reason, for every stock that Equitymaster recommends, we do a thorough due diligence. We meet the management in person. More than once if needed. We visit offices, factories, and stores. We talk to the competition. We check past communication from the company, regulators, etc. And the information we gather forms the basis of our qualitative evaluation of the stock.

As far as quantitative analysis, we look for any unusual changes to assets and liabilities. If we find sharp changes to balance sheet items such as debtors, investments, cash on books, or loans to subsidiaries, we alert investors. We also keep track of inter-company transactions between a parent and its subsidiaries and associates.

In other words, we do everything we can to avoid recommending shady companies. However, please appreciate that our efforts are limited to our capacity as analysts. We are not investigative journalists. We have to rely on the auditor's notes for the authenticity of the financial statements. In cases where we don't find any reason to question the authenticity of the books, we rely on the long-term financial track record of the company.

If we hear news of any wrong doing, we speak directly to the management. And if we need more convincing, we go to the competition. If the answers aren't convincing, we recommend investors exit the stock. If the answers are convincing, we recommend investors not increase their exposure. In any case, we never recommend investors expose more than 3% of their portfolio to small caps, however promising.

In short, we make every effort to alert you as early as possible to any wrongdoing at the companies we recommend. However, it may not be possible for us to pre-empt the wrongdoing.

'We are far from done'

I just read Rahul Shah's monthly mailer, The Microcap Millionaires Digest.

And I couldn't help but ask his permission to reproduce few lines here....

  • Our latest Microcap Millionaires report marked two years of the service. I can vividly recall how the first few months since the launch turned out to be the most productive.
  • It was the time where we recommended a whole host of stocks, most of which went on to give fabulous returns. Titagarh Wagons was a huge six-bagger in less than a year! Then there were stocks like LLOYD Engineering, HIL Limited and Navin Flourine that ended up a near 3-bagger. As much as these stocks had great fundamentals, the attractiveness of the broader markets also worked in their favour. That the Sensex was valued at less than 18x, a good entry point from a long term perspective, did juice up overall returns.
  • As I was writing last month's reports, I couldn't help but notice how the Sensex valuations were eerily similar to the time of launch. Back then, just as it is now, Sensex was valued below 18x. This means we will move quite a bit of the portfolio funds into stocks, a process that we already started last month.
  • We are far from done though.

Sorry to leave you with this cliff-hanger. But what Rahul goes on to reveal is for Microcap Millionaires subscribers only...

But his key message is that Microcap Millionaires portfolio is far from done! And going by the portfolio's track record since launch, the returns are set to get even more exciting!

  Returns since inception (Feb 2014)
Microcap Millionaires portfolio 59%
BSE Sensex 15%
BSE Small-Cap Index 49%

The next Microcap Millionaires report is scheduled to go out on 18 March.

Click here if you don't want to miss it!

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