Analyzing the Winner Part – 1
What has Worked in the Past will work in the Future, There is Nothing new in Investing & Markets, The Stock Name changes though the Patterns Remain the Same again & again.
Today i would like to Highlight not what stocks to buy (Of course we charge a Small Fees for that) but what patterns work in Markets. We are students of History especially on what works & what does not work is what our Focus has been since inception.
Majority of the Team at Stallion, Spend Majority of their Time to Build frameworks for Investing to Achieve our Goals of helping our customers create wealth.
Unless you buy Companies at atrocious valuations like the IT bubble in 2000, Secular Growth rate of Revenues & Profitability is typically followed by Secular Compounding
Same time Next week, we will discuss winners of the Past & they pivot from one Opportunity to Another to Create Secular compounding but today i will just leave you with some insights of our Newsletter of this month.
True Sense of Market Leadership
Market Leadership (other than Business Market Share) in the truest sense for us Investors is how Markets are respecting those Leaders over year on year basis.
We tried to dig in some data, which stocks have hit new highs every year since last 20 years or their Listing.
The data of course wasn’t surprising to us; it just strengthened our conviction holding the Consumer Monopolies in the Portfolio.
(Explaining the Table –
- First Column – Names of the Companies
- Second Column – Broad Sectors of the Companies
- Third Column – Number of Years Stocks have hit new highs since their Listing or March 2001 based on NSE Data
- Fourth Column – Percentage of Years it has hit a new high since their Listing or March 2001 based on NSE Data
- Fifth Column – EPS CAGR since their Listing or March 2001 or available Financial Data prior Listing
- Sixth Column – Stock Price CAGR since their Listing or March 2001
- Seventh Column – Difference of 6th and 5th Column, explaining the valuation Expansion in these companies over the years.)
Highlights from the above Table –
- We came across 56 companies who have made new highs in at least 75% of time since their listing or March 2001. (till March 2021 data, with pre-condition of atleast 4 years of Traded History)
- Out of 56 companies, atleast 24 companies belonged to the Consumer sector alone, capturing a lion-share of 43% of total companies in this list.
- Whereas for Financials space, only 7 companies cut the list, where their average ROE were in excess of 18% Muthoot Finance off the list had highest ROE of >30%. Proven Franchises in Financials are more important than in any sector given the Leverage in the business.
- Even the most the under performing companies (by EPS CAGR), they had one thing in common, and they were largely MNCs, where Valuation CAGRs cushioned their low EPS CAGR.
- In India, if you are a Consumer Monopoly, Valuation Expansion with Earnings Growth cannot be ignored for total returns.
- One space, which did surprise us, was Chemicals! Atul, Deepak Nitrite, PI Industries and Vinati Organics made the cut. The average EPS CAGR in these 4 companies was close 29.2%.
- From this list, we have seen a handful of companies seen a contraction on Valuation CAGR, so even you are starting at very high valuations as in the case for Crompton, Shree Cement, Jubilant Foodworks, Alkem, PI Industries, etc. The least Stock price CAGR even from these set of companies was 15%+, where valuations contracted (Alkem Labs)
- We did work on the key ROCE and ROE numbers for these companies, the average ROCE for these companies across years has been close to 27%+ (Non-Financials), whereas ROE has been on similar lines too. If the ROCEs are equivalent to ROEs, it indicates broadly “no leverage”. Net-Net No leverage, Markets rewarded those companies.
Our Learning –
Learning #1 – Consumer Monopolies create largest and durable Wealth in the Indian Markets.
Learning#2 -If one is buying companies in Financials, sabka time aata hai yaha! One needs to be watchful on Financials be it a HDFC, Bajaj or even Kotak (HDFC Bank has been only constant here, if we dig the same list from 2001-2011, all the PSU Banks have popped up in the list). Low cost borrowing is not the only advantage here, its also the strength of underwriting loans.
Learning #3- Buy Predictable Businesses. If you have a leader in hand whose earnings are secular and less volatile, be patient! Predictability in these franchises adds to the returns as well, the median Sales Growth volatility for these 56 companies v/s the universe had a difference of 830 bps, which is huge.
No predictability in sales (High std. dev in Sales Growth) = No addition to Valuation CAGR.
Learning #4 – Any ROE/ROCE above 25% for a company; it has crossed a highly set threshold of Markets, which is enough to create Wealth!
DISCLAIMER: The above blog should be used for informational purposes only. None of the stocks named is an investment advice nor is a investment recommendation in any manner. The above blog is derived from Stallion Asset Research Desk monthly newsletter. We request you to do your own due diligence before investing. The Stocks Mentioned are not recommendations, Just a Research Paper.