Is a Good Purchase Better Than a Good Sale? - Views on News from Equitymaster

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The Equitymaster Research Digest

Is a Good Purchase Better Than a Good Sale?
May 20, 2016

  • Never count on making a good sale. Have the purchase price to be so attractive that even a mediocre sale gives good results. - Warren Buffett

The Microcap Millionaires (MCM) team should pin this gem from Warren Buffett on the noticeboards right in front of their workstations.

That the world's greatest investor hasn't mastered the art of the sale should be a lesson to us lesser mortals.

Our recent sale of Kakatiya Cement Sugar and Industries Ltd further makes the point.

Anyone who hasn't seen the entire price history of this recommendation would probably be impressed. Since February 2015, when we gave it a buy, the stock has gone up an impressive 100% in just over a year.

So we decided to revisit the fundamentals and valuations to see whether the rally still had legs.

Here's what we told our subscribers:

  • While sentiments are definitely positive, we think a lot of the improvement in fundamentals is already getting reflected in the valuations. The stock commands a valuation of nearly one times its FY15 book value as opposed to the last ten-year average of 0.6x.
  • In other words, there's nearly a 70% premium to the average valuations of the last 10 years. Even if the business performance were to improve a lot, the stock's still going to look properly priced.
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