How Our Subscribers Pocketed 17% Dividend Yield... - Views on News from Equitymaster

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The Equitymaster Research Digest

How Our Subscribers Pocketed 17% Dividend Yield...
Oct 27, 2016

  • Throwing darts to make money
  • Overblown small-cap concerns

Buying a commodity stock can be trickier than you might imagine. Try doing it when the underlying commodity's price is crashing. It's like trying to catch a falling knife. And unless you are really skilled and careful, you're bound to get cut.

At Equitymaster, we never try to speculate on commodity prices. Rather, according to us, a good job of studying the balance sheet numbers closely offers enough clues of margin of safety. In fact there have been several instance when we recommended commodity stocks close to the bottom of the cycle. Our conviction lay primarily in the sustainability of the business. And more importantly, the risk reward ratio being skewed in favour of the latter.

When we recommended Hindustan Zinc to StockSelect subscribers in July 2015, the trend in zinc prices were not very favourable. By January 2016, the commodity's prices hit a five year low. The stock corrected by as much as 30% from our recommendation price. Had we speculated on the price trend of zinc, subscribers would have to exit the stock with losses. But it has always made sense to stick to our process rather than take a subjective view of a stock's performance. The process of evaluating the stock said that sufficient safety net had already been built into the recommendation.

First of all Hindustan Zinc had a track record of strong financials and zero debt. Also, at the end of March 2015, the company had Rs 307 bn of cash and cash equivalents on its balance sheet. This translated into cash per share of Rs 73. With stock price at the time of our recommendation Rs 156, roughly 47% of the market price was then represented by cash. Add to that the company's consistency in doling out attractive dividends to shareholders.

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