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Will This 80-bagger Continue to Rule Your Portfolio?

Dec 22, 2017

Rahul Shah, Editor, Smart Contrarian

Maruti made its debut on the stock exchanges the same year I made mine at Equitymaster. And with the word about my new occupation spreading fast amongst friends and relatives, it was one of the first stocks on which I was asked my views.

While I don't remember what advice I gave out, I certainly hope I didn't tell anyone to exit from the stock. Because if they did - those poor souls would have been really sorry this week.

India's largest auto manufacturer by a distance, Maruti saw its share price touch the coveted Rs 10,000 mark for the first time in history last Wednesday.

This is not the only feather in its overflowing cap, though. As a leading daily highlighted, the stock has surged more than 80% this year, outperforming the index by nearly 3:1.

It is now amongst the top five most valuable companies in India, has a market cap that's more than that of Tata Motors, M&M and Hero Moto combined, and is more expensive in terms of price to earnings (P/E) than the Italian car maker Ferrari.

I think this is as good an endorsement for the Coffee Can Portfolio as they come.

We have written about this concept in detail here and here.

Here's the crux of it.

We humans worry too much. And while taking action at the smallest hint of trouble was a good strategy out on the Savannahs for the earliest Homo Sapiens whose genes we inherit, it doesn't serve us well in the stock market.

It causes us to attach too much importance to a bad quarterly result, or bad sales numbers, and forces us out of good quality stocks.

Treating every stock you buy as part of a Coffee Can Portfolio is therefore a great antidote for this kind of a behavior.

It compels you to take a long-term view of things without your judgement getting clouded by things like quarterly results or near term economic outlook.

And these events were plentiful in the limited time Maruti has spent being a listed company.

A bad quarterly result every now and then, threats to its market share, cost pressures, product failures, entry of new players... It witnessed everything.

However, it never took its eye off the ball, always trying to ask tough questions, always trying to stay two steps ahead of the competition. And the fact that it remained in excellent financial condition all through helped enormously.

Therefore, all one had to do was buy right and sit tight to be rewarded with a fantastic 80-bagger on the company's IPO price.

There aren't many stocks around that have given a 35% CAGR over such a long period of time. Maruti is not just king of the Indian streets, it has also lorded over Dalal Street.

With the Rs 10,000 landmark done and dusted, what better time to ponder the company's place in the Coffee Can Portfolio?

Should Maruti stock be stashed away for another ten years?

Based purely on the past performance and the company's current standing, the answer should be a resounding yes.

However, if past performance is all there is to the game of investing, historians would have been the most successful investors.

And I, for one, can see a lot of challenges that can lead to the road ahead being extremely bumpy for India's largest car maker...

None bigger than the looming electrification of the world's car fleet. The push to decarbonize the country's roads is gathering pace, but Maruti seems to be reluctant to get on board. In fact, they brushed it off saying the idea doesn't seem practical. Not what you expect from a leader used to setting the pace.

When a mighty company is felled, it is usually because it has left a flank undefended.

Is this flank going to be electric vehicles for Maruti? We don't know for sure.

And to be fair, they did make amends by recently announcing the launch of an EV by 2020.

But these are unchartered waters for the company. To expect it to perform the same magic as it did in conventional cars would be undermining the competition.

So I'm not sure if I'm ready to recommend the company for a spot on the Coffee Can Portfolio this time around. And even if it does go in, I'd recommend keeping a close eye on it - a periodic check as opposed to a BUY and FORGET approach for the stock.

Good investing,

Rahul Shah (Research Analyst)
Editor, Smart Contrarian

Brain Food for the Day

Three Ways to Derail a Long-Term Story

Technological obsolescence is one of the biggest stumbling blocks to the long-term success of any company. So much so that even Warren Buffett is wary of it. He is often heard saying that while he likes what technology has done for the benefit of mankind and its productivity, he doesn't like a lot of technology in his investments. He likens industries with lot of disruptive technologies as a terrain that is forever shifting - one where it is impossible to build a sustainable business.

However, this is not the only stumbling block that can crush the dreams of even the biggest of companies out there. If strategy guru J Carlos Jarillo is to be believed, change in government regulation, and change in demand from end users can do the same thing.

What's happening in the car industry is a classic case of government regulation forcing the hand of auto companies and putting their survival in their current form at risk.

And while change in demand from end users cannot always be foreseen, we can certainly react to it. Like, an ageing country could pose a serious risk to companies having products for the young brigade. On the other hand, it may open opportunities for products for an older set.

All in all, the three agents of change we just discussed are the ones to watch out for, and the long-term future of a company be weighed against. It could help you build a much stronger Coffee Can Portfolio.

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4 Responses to "Will This 80-bagger Continue to Rule Your Portfolio?"

Ashok Kumar surana

Dec 23, 2017




Dec 23, 2017

Time to book profits in Maruti and buy into Tata Motors which is about to turn around !!!



Dec 22, 2017

What Rahul Shah says about keeping a close watch on Maruti stock is true with every investment in shares. Also the doubts expressed by him about electric vehicles also apply to other manufacturers as well. So , just as its a level playing field now with fossil fuels it would be so with EVs too. So there is no reason to believe why auto companies which are market leaders now would not remain so in future ? Ofcourse there is no guarantee but then nothing is guranteed in stock market !


Ravindra K

Dec 22, 2017

Mr Bhargava has made it clear that EV will not succeed unless it is affordable and meet the requirements of Indian people. They are already ahead of game as Suzuki has tied up with Denso to manufacture Batteries. Now they are conducting a survey to finalize their plan. They have gone one step ahead on how to dispose the used Batteries. They were also clear about self driving car which may not be practical to local condition. Despite all these qualities only pessimist comments have been made.

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