Basant Maheshwari, founder of theequitydesk.com, has a simple investment formula. He has neither the time nor the patience to go hunting in nooks and crannies, looking for “hidden gems“. Instead, he finds stocks that are already on the winning track, mounts them midway and rides them all the way to the finishing line. This strategy has paid off very well over the years without putting his capital to much risk.
Also, Basant Maheshwari’s USP is that he is not afraid of stocks quoting at a high PE ratio. In fact, he actively seeks such stocks by peering at the list of stocks that are hitting new 52 week highs in the expectation that these stocks must be doing something right and there may be more steam left in them.
Now, this approach of Basant Maheshwari is in sharp contrast to the approach of a number of other stock pickers and investors who sub-consciously shy away from high-PE stocks in the fear that there is no ‘margin of safety‘ left. For such investors, the safety lies in buying stocks that are quoting at low valuations or with a high dividend yield. For Basant Maheshwari, the ‘margin of safety‘ is in the high growth that he expects the stock to deliver in the foreseeable future which will justify the present high PE.
So, lets look at some of Basant Maheshwari’s recommended stocks and see how they have performed over the years.
(1) Page Industries:
Basant Maheshwari recommended Page Industries in July 2011 when it was quoting at Rs. 2085, at a PE of 40. In recommending Page, Basant Maheshwari coined a classical explanation of what constitutes a great company. He said “A great company is one that generates high return on capital, has got free cash-flow and over a period of time distributes that free cash flow as dividends for the shareholders“. Page Industries is one of such companies, he said confidently.
What Basant Maheshwari liked about Page is the fact that it had an asset-light model, had a virtual monopoly over the premium inner-wear segment and had huge pricing power. All the ingredients required for success.
Well, the proof of the pudding is in the eating. At the CMP of Rs. 4,239, Page Industries has given its shareholders a return of 103% since July 2011. In the last one year itself, Page has given a return of 37%.
(2) Hawkins Cooker:
Basant Maheshwari’s second stock pick, also in July 2011, was Hawkins Cooker which was quoting at a PE of 25. Again, the formula was the same. What Basant Maheshwari liked about Hawkins was the fact that it had a powerful brand name, low capital requirements, high revenue, high return on capital, high return on net worth and a high dividend payout.
This stock pick also worked very well except that Hawkins got into trouble with the Pollution Control Board and its labour force. So, while the return from Hawkins since the time Basant Maheshwari recommended it is only 23%, the stock has given a 42% return on a YOY basis and a 68% return on a 2 year basis.
(3) Gruh Finance:
Basant Maheshwari’s third stock pick, in August 2011, was Gruh Finance, the subsidiary of the venerable HDFC. Here again, the formula was the same. Top quality management, dominant market position and high ROE.
Gruh Finance, even then, was quoting at a PBV of nearly 5 times. However, that did not deter Basant Maheshwari and rightly so because since then its’ lucky shareholders have taken home a return of 156%.
(4) Titan Industries:
Basant Maheshwari’s fourth stock pick was Titan Industries, Rakesh Jhunjhunwala’s crown jewel stock. Here again one gets a glimpse of Basant Maheshwari’s thought process because he makes it clear that the fact that a stock has run up a lot is no reason to not buy it because “stocks that have gone up can go further up a lot“.
However, Basant Maheshwari has had modest success with Titan Industries because since the time he recommended it (August 2011), it has given a return of only 28% (about 15% annualized).
Bharat Shah of ASK Investment has a similar stock picking strategy. In an interview, he gave fantastic insights into why investors should buy top quality stocks instead of fussing around with so-called “cheap stocks“. He explained that quality businesses (like Asian Paints, HDFC Bank, Sun Pharma) are consistent businesses with great predictable franchises with the ability to price the products at an appropriate level and obtain fantastic return on capital employed. They have visibility of opportunity and predictability of earnings growth and are almost immune to market cycles, he said.
So, the bottomline of the thesis is that one need not be wary of stocks quoting at a high PE. Also, one need not shy away from buying stocks only because they have run up a lot in the recent past. Instead, what one needs to do is to objectively evaluate whether the stock will show the same or higher rate of growth in the foreseeable future having regard to the market dynamics of demand and supply. If the answer is in the affirmative, one can go ahead and confidently buy the stock.