Thursday, March 31, 2016

Future of the Stock

A Value Stock is the one which trades at a discount to its intrinsic value. The intrinsic value can be found out through future cashflows or dividends or by using a discounted cash flow analysis. such stocks exhibits high dividend yields and lower price to earnings ratio. The intrinsic value of a stock is based on the future prospects and predictability of earnings. Many of us look at the past earning and history of performance but this in my opinion can lead to a trap. Business landscape today is changing so radically, the past formula of success is being re-written. Technology, changing demographics play a crucial role is such unprecedented change. So the value of the company is based on the future earnings and performance which should be the new reference. Recently we sold most of our holdings in a FMCG company that we held for almost 4 years. The earnings had not only deteriorated in the past few quarters but we see a huge dilution of demand. This company had grown at rapid pace for the past several years and likely to see slackened future earnings prospect, a good enough reason to sell the stock. In the portfolio, we have replaced with a Finance company that we believe should offer future prospects.

How does one predict the future? Some businesses especially technology firms believe you create a future by disrupting the present. Visionary business leaders have the magic eye to see what is changing and adapting their business models to take advantage of such changes. With such changes we will see value migration that will result in huge uptake of demand. A well known example is the how the nuclear family lifestyles has created demand for cookers. More nuclear families meant more cookers. TTK Prestige was able to take advantage of this change is lifestyle by launching products that looked and felt better. But companies like Hawkins failed to take full advantage of such changes.

The opportunity is the same for the market, but the management that has an eye for how the markets will change are the ones that will succeed.

In the Banking industry HDFC bank has proven how they could anticipate and manage change better than others. But Change is constant and so will have to be the management to keep ahead of change.

On a side note, Lupin drew some negative attention correcting by a whopping 40% in 6 months. Do we see value in it at 1300? 

Check this Video to see how they are managing the change