Stocks for the long and short term portfolio
- Thread starter jamit_05
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where are my posts?? why are they removed from thread?? this is humiliating.
Why it is justified to buy stocks of high PE.
I recommend readers to focus on EPS, as it covers all strengths, weaknesses of the company and the national economy. And esp for growth stocks, where investors expect to see a steady rise in EPS. When that expectation is not met, the stock crashes. One will find this happening in recent crashes of OCIL and Sintex.
Let us discover the logic behind it and see the numbers?
Lets take Sintex Ltd. It promised great prospects and attracted large investor money, shooting its share price from Rs.3 in 2002 to Rs.300. Hence, increasing market cap by a 100 times!
These investors were not wrong. They had a logic. They bought into the promise of Sintex. They projected into the future. They figured, if EPS of Sintex is growing at a scorching pace of 20% a year, then even a current PE of 40 will result in a Annual Yield of 30% some years down the line.
Annual Yield = (Earning Per Share/Price of Purchase)
For ex. Annual Yield of FD (pre-tax) = 8.25%
But, this promise was not met. When EPS shrunk from a high of 14.70 in F.Y.10-11 to below 10 in F.Y.11-12 (in an year) investors' dreams of 30% A.Y. were shattered. With no hope for growth Sintex again became an ordinary scrip and its PE came back down to sub 5 levels.
Same story with OCIL. The numbers were excellent. The growth was scorching. Acquisitions were made every quarter and the promise was big. It was an undisputed leader. But, investors understand and rely on only one number EPS! If the company fails to print a growing EPS, investors won't oblige.
Now, let us relive this story for Gruh Finance Ltd. It is at a high PE of 26. Should one buy it now or wait for correction?
I recommend readers to focus on EPS, as it covers all strengths, weaknesses of the company and the national economy. And esp for growth stocks, where investors expect to see a steady rise in EPS. When that expectation is not met, the stock crashes. One will find this happening in recent crashes of OCIL and Sintex.
Let us discover the logic behind it and see the numbers?
Lets take Sintex Ltd. It promised great prospects and attracted large investor money, shooting its share price from Rs.3 in 2002 to Rs.300. Hence, increasing market cap by a 100 times!
These investors were not wrong. They had a logic. They bought into the promise of Sintex. They projected into the future. They figured, if EPS of Sintex is growing at a scorching pace of 20% a year, then even a current PE of 40 will result in a Annual Yield of 30% some years down the line.
Annual Yield = (Earning Per Share/Price of Purchase)
For ex. Annual Yield of FD (pre-tax) = 8.25%
But, this promise was not met. When EPS shrunk from a high of 14.70 in F.Y.10-11 to below 10 in F.Y.11-12 (in an year) investors' dreams of 30% A.Y. were shattered. With no hope for growth Sintex again became an ordinary scrip and its PE came back down to sub 5 levels.
Same story with OCIL. The numbers were excellent. The growth was scorching. Acquisitions were made every quarter and the promise was big. It was an undisputed leader. But, investors understand and rely on only one number EPS! If the company fails to print a growing EPS, investors won't oblige.
Now, let us relive this story for Gruh Finance Ltd. It is at a high PE of 26. Should one buy it now or wait for correction?
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Re: Why it is justified to buy stocks of high PE.
Amit -As per the above, EPS is one of the main attribute to determine the fortune of the company.. In such case when I tracked down persistent system (after reading your above post) I could see that the company had made a good progress in their EPS.. they hav missed their EPS growth jus once in the last 5 quarters.. Even their debt is close to zero! So does it has the potential of becoming a multibagger?
Amit -As per the above, EPS is one of the main attribute to determine the fortune of the company.. In such case when I tracked down persistent system (after reading your above post) I could see that the company had made a good progress in their EPS.. they hav missed their EPS growth jus once in the last 5 quarters.. Even their debt is close to zero! So does it has the potential of becoming a multibagger?
Re: Why it is justified to buy stocks of high PE.
To answer your question, I will ask you to go back to your objective of making an investment.
My objective of investment is to find a company, in which I can stay invested for a very long term, like a decade or so and in that period see the EPS of the company consistently grow by around 10% and then flatten out, to give me an Annual Yield of at least 25%.
We have three things here:
1) Company should see the other side of the decade
2) Grow by 10% in that period (in EPS, not in Net profit/Revenues and then dilute equity!)
3) Finally, become stable.
So, when I emphasized on the importance of EPS, I was talking about point #2. And all the while, I assumed that point #1 is in place.
Now, what goes into a company to ensure its survival and growth over two economic cycles is a very interesting subject, which I will be glad to make a post about.
Regards,
Amit.
PS: Many Small Caps show promise and in the next down-cycle fizz out. This % is very high in Small Caps. Do you believe Persistent Systems can survive a decade and grow its EPS? If so why?
To answer your question, I will ask you to go back to your objective of making an investment.
My objective of investment is to find a company, in which I can stay invested for a very long term, like a decade or so and in that period see the EPS of the company consistently grow by around 10% and then flatten out, to give me an Annual Yield of at least 25%.
We have three things here:
1) Company should see the other side of the decade
2) Grow by 10% in that period (in EPS, not in Net profit/Revenues and then dilute equity!)
3) Finally, become stable.
So, when I emphasized on the importance of EPS, I was talking about point #2. And all the while, I assumed that point #1 is in place.
Now, what goes into a company to ensure its survival and growth over two economic cycles is a very interesting subject, which I will be glad to make a post about.
Regards,
Amit.
PS: Many Small Caps show promise and in the next down-cycle fizz out. This % is very high in Small Caps. Do you believe Persistent Systems can survive a decade and grow its EPS? If so why?
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Atul Auto
PROS:
1) Consistently growing EPS.
2) No equity dilution.
3) Growth is medium paced.
4) Long term Debt is stable. Means, management is healthily defensive.
5) Management believes in organic growth.
CONS
1) A little high on debt, hence EPS could take a hit.
2) Slightly high debtor days of 4 months, which is typical of small companies. This sometimes spins out of control. Sintex, OCIL are ex.
3) Very expensive right now. At ATH. Could easily see a 50% correction in a bad year.
4) Profit margin is on the lower side. Interest paid is almost half of the Net profit!
My Conclusion:
It is a small cap company. I do not like the category as i do not aim for sky-rocketing returns. I aim for stability and gradual growth. Even if, I get an attractive price of purchase I will buy less.
It is also a mediocre company, hence I would definitely want full margin of safety.
Rs. 90 to 140 is the band of purchase.
PROS:
1) Consistently growing EPS.
2) No equity dilution.
3) Growth is medium paced.
4) Long term Debt is stable. Means, management is healthily defensive.
5) Management believes in organic growth.
CONS
1) A little high on debt, hence EPS could take a hit.
2) Slightly high debtor days of 4 months, which is typical of small companies. This sometimes spins out of control. Sintex, OCIL are ex.
3) Very expensive right now. At ATH. Could easily see a 50% correction in a bad year.
4) Profit margin is on the lower side. Interest paid is almost half of the Net profit!
My Conclusion:
It is a small cap company. I do not like the category as i do not aim for sky-rocketing returns. I aim for stability and gradual growth. Even if, I get an attractive price of purchase I will buy less.
It is also a mediocre company, hence I would definitely want full margin of safety.
Rs. 90 to 140 is the band of purchase.
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pool,
Contrast Atul Auto, with another small-cap: Greaves Cotton. I have made a post on it earlier. I particularly like it because its management is wise. Even in such tough times, they are positing a positive figure on Free Cash Flow. And trust me its rare in Engineering Sector! In 2012, they spent 100 Crores on Expansion because they saved 110 Crores from that years business.... I love that philosophy of Organic Growth. They are making an international presence and are super well established in India as they have been around since 1859!
Plus
1) It has Zero Debt, hence boosted profits. They have eliminated all debt in the last decade.
2) Decent pace of growth in sales.
3) PE is a lot more attractive at 9x
4) Has RoA as high as 13 and RoC 30. These are really good numbers. Profit isn't everything. Strength in RoA and RoC signal how well the company is managing its money. (Some showy Co. could have a 10% net margin and buy a very expensive personal office building! This would scare me or require high working capital)
However, the problem is GC went for dilution in 2010. Hence, its EPS has drastically come down from 24 to 6!
I am confident that its Share price will fall further because the sector is doing poorly. Nifty climbed 1200 points but these companies barely even touched Monthly EMA 15. My ideal price of entry is Rs.36, but am willing to compromise.
Contrast Atul Auto, with another small-cap: Greaves Cotton. I have made a post on it earlier. I particularly like it because its management is wise. Even in such tough times, they are positing a positive figure on Free Cash Flow. And trust me its rare in Engineering Sector! In 2012, they spent 100 Crores on Expansion because they saved 110 Crores from that years business.... I love that philosophy of Organic Growth. They are making an international presence and are super well established in India as they have been around since 1859!
Plus
1) It has Zero Debt, hence boosted profits. They have eliminated all debt in the last decade.
2) Decent pace of growth in sales.
3) PE is a lot more attractive at 9x
4) Has RoA as high as 13 and RoC 30. These are really good numbers. Profit isn't everything. Strength in RoA and RoC signal how well the company is managing its money. (Some showy Co. could have a 10% net margin and buy a very expensive personal office building! This would scare me or require high working capital)
However, the problem is GC went for dilution in 2010. Hence, its EPS has drastically come down from 24 to 6!
I am confident that its Share price will fall further because the sector is doing poorly. Nifty climbed 1200 points but these companies barely even touched Monthly EMA 15. My ideal price of entry is Rs.36, but am willing to compromise.
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