Sunday, May 06, 2018

Value Investing

Amongst the various thesis and styles in investing, value investing is very relevant at the moment where the markets have hit a high and there seems to be minimal upside and more downside.

It merits to look at this style where we pick stocks that are trading at a discount to their intrinsic value, offers reasonable margin of safety. Other metrics to look for, is if company is operating in a space that has room for exponential growth, and the overall quality of its business. Generally in markets like today, we will be able to identify such companies which are no so popular and are mid-caps in category.

Better still if such companies are going through temporary disruption or through a difficult period. You get to buy a bargain when the seller is selling in distress. The famous example is of investing in Rain industries which was available at P/E of 1 when the profits were Rs 90 crores and the company was going through disruption. The company then multiplied its profits over the next few years by 10X to Rs 800 crores profits. An investor would have multiplied his wealth 10 times in this period.
The most important criteria in value investment is that the down side should be minimal which makes the investment 'low risk'. As they say, Minimize the downside and upside will be taken care of by the business.

Currently a company in the mid cap space that adds value in commodity space is available for a mcap of Rs 390 crores with headroom for growth. Aluminum is consumed by almost every industry one can think of and offers exponential growth prospects. The business is cyclical as it is closely connected to commodity cycle but available at reasonable valuation. Because these companies are small in size, they have a lot of room for growth and could even become potential multi-baggers. An ideal time frame for which to invest in these companies would be 3-5 years.

As the legendary investor said “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results”. India continues to offer businesses with prospects for long term growth and opportunities for multi fold returns to investors.