Guide to finding 10-bagger and 100-bagger stocks
Mohnish Pabrai delivered a lecture recently in which he explained in detail the techniques that he and other illustrious investors use to snare 10-bagger and 100-bagger stocks.
In the lecture, Mohnish has not only recounted from his own practical experience but has also drawn from the wisdom of other eminent Gurus such as Guy Spier and Li Lu.
The essence of Mohnish’s advice is that we must aim to buy stocks which will protect our capital and also grow at a steady pace for several years to come.
Compounding converts paltry amounts into massive fortunes
Mohnish emphasized that if we can find a stock which compounds its earnings at a CAGR of 26% (difficult, but not impossible), our capital will double in just three years (100% gain). In ten years, the capital becomes 10x (1000% gain). In 20 years, the capital grows 100x. In 30 years, the capital morphs into an unbelievable 1000x.
In other words, a paltry sum of Rs. 1 lakh invested today in a stock compounding at 26% CAGR will become a king’s ransom of Rs. 10 crore in 30 years, Mohnish pointed out.
Rain Industries – Restructuring initiatives to drive earnings growth
One of Mohnish Pabrai’s favourite stocks is Rain Industries, a small-cap (Rs. 1776 crore) engaged in the manufacture of coke and other chemicals.
As of 30th September 2016, two of his funds called Pabrai Investment Fund 3 Ltd and The Pabrai Investment Fund II LP collectively hold a treasure trove of 290,12,715 shares of Rain Industries worth Rs. 154 crore at the CMP of Rs. 53.
The investment has worked out quite well for Mohnish because Rain Industries is up 41% on a YoY basis and 17% over two years.
Mohnish has now good reason to be happy because IDBI Capital has conducted an expert analysis of the stock and confirmed that it has a target price of Rs. 82, which is a hefty upside of nearly 51% from the CMP.
The rationale given by IDBI Capital is quite convincing:
“Rain Industries Ltd. (Rain) is one of the largest producers of calcined petroleum coke (CPC) and coal tar pitch (CTP) in the world with operations spread across North America, Europe, India and Russia. Apart from large size, Rain has long standing relationships with suppliers to source the key raw materials – green petroleum coke (GPC) and coal tar. During FY13-15, Rain’s profitability was affected due to lower demand from its end customers (aluminium industry). Nevertheless, Rain took several initiatives including setting up a greenfield distillation unit in Russia, partially securing supply of raw material (coal tar) for its European CTP plants, setting up CPC blending facility in India, etc which is likely to push volumes and improve margins. Further, the company has nearly completed its capex cycle and is focused on deleveraging balance sheet and refinancing (to lower interest costs). These measures are likely to boost its net profit (27% CAGR over FY16-19) over the coming three years as per our estimates. We value the stock on sum-of-total-parts (SOTP) basis and initiate coverage with a BUY rating.”
Balaji Amines – Combo of chemicals and hospitality
Mohnish has also taken a fancy for Balaji Amines, a small-cap (Rs. 1016 crore) engaged in the manufacture of chemicals and running a 5-star hotel.
As of 30th September 2016, his Pabrai Investment Fund IV holds 607,204 shares. The investment is worth Rs. 19 crore at the CMP of Rs. 314.
Multibagger stock recommendation of Porinju Veliyath – 300% gain in 18 months
It is unbelievable but true that Porinju Veliyath had recommended a buy of Balaji Amines in March 2015 when the stock was available at the throwaway valuation of Rs. 86.
Today, barely 18 months later, Balaji Amines is standing tall at Rs. 314, putting mind-boggling gains of nearly 300% in the pockets of the people who acted on Porinju’s advice.
Favourite stock of Shyam Sekhar
An indication that Balaji Amines is safe as a house comes from the fact that Shyam Sekhar, the noted value investor, has entrusted a large part of his capital to the stock.
Shyam Sekhar is known to be ultra strict about the quality of the stocks that he entrusts money to.
As of 31st March 2016, Shyam Sekhar and his family members held 391,561 shares. Their present holding is not known.
Buy recommendation of Nirmal Bang – Re-rating due to improvement in ROCE, ROE and positive free cash flow
Nirmal Bang has issued a Q2FY17 result update report in which it has opined that Balaji Amines has a target price of Rs. 405. This translates into a hefty potential upside of 28% from the CMP of Rs. 315.
The rationale is as follows:
“For FY16-18E we expect the company’s sales to grow by 17.4% and PAT by 42.6% (as interest cost if likely to come down and with no major capex lined up depreciation is likely to be stable at current levels). BAL is leading amine player and enjoys handsome market share in its basket of products. It is consistent dividend paying company and is poised for good growth and is available at attractive valuations. We believe there is scope of re-rating of the stock given the improvement in ROCE and ROE with positive free cash flow. We recommend HOLD on the stock for price target of Rs 405 (11x FY18E)”.
Safety first, gains later
One of Mohnish Pabrai’s famous credos is that one should buy stocks where the odds are “Heads I Win. Tails, I Don’t Lose Much”, implying that one should invest in only those stocks where even in the worst case scenario, one can expect to get the capital back in one piece. Both of Mohnish’s latest stock picks appear to satisfy this requirement. In the worst case scenario, they will churn out a respectable return. In the best case scenario, they will turn into magnificent multibaggers and create humungous wealth for investors!