Every crisis is an opportunity
Sir John Templeton, the illustrious Billionaire founder of the Templeton Mutual Fund, coined the immortal advice that investors should always buy stocks when there is fear on the Street.
Mark Mobius learnt the ropes of investing at the Templeton Mutual Fund and took it to great heights.
He echoed the advice of Sir John Templeton.
“If there is a big crisis, then there is usually an opportunity to get the stocks that you wanted to buy at a much lower price,” the veteran said.
“If you take the opportunity to get those cheap stocks when the blood is on the street, then you can outperform,” he added.
He also pointed out that the crisis situations do not come regularly. However, when they do, we must have the courage to dive in head first and brave the odds if we aspire to outperform our peers.
Forget valuations, look at growth
Mark Mobius provided valuable input on the present controversy as to whether or not there is a “bubble” in the valuations of high-quality stocks.
He made it clear that he is not much impressed by the experts who are obsessed about the P/E ratios of stocks.
“The big mistake that we made in the past and many investors continue to make is that they look at the price earnings ratio. They look at the price to book value and say if it is selling at below book, it must be cheap. Not necessarily, because the market looks forward. That is the reason why what I do is focus on return on capital employed,” he advised.
He also suggested that we should focus on the Return on Capital Employed (‘ROCE’) and the dividend yield of the stock.
“If a company can have a 20% return on capital employed, that means they have the resources to grow and they can put more money into this growth plan,” he said.
“In addition the sign that I look for is that the company can pay dividends and also grow,” he added.
Secret formula to finding winning stocks
Mark Mobius revealed that he follows a straight-forward formula to home in on winning stocks.
In order to qualify for reckoning, a stock must tick all the following three boxes:
(i) It should be a powerhouse with a RoCE of not less than 20%;
(ii) The dividend yield should be not less than 3% which implies that the valuations are reasonable and there is real cash in the books;
(iii) The debt : equity ratio should not exceed 0.5x.
“I would buy the stock that has over 20% return on capital, pays a dividend yield of 3% or 4%, has a debt equity of less than 50%, has no multiple share classes, one share class and has a turnover of at least 2 million a day,” the veteran revealed for the first time ever.
“I look at the fundamentals more carefully, not the price earnings ratio. Price earnings is almost irrelevant now because with interest rates at these low levels, you tolerate a very high PE but, we look at return on investing capital. We look at whether the company pays dividends which is an indication of good corporate governance. We look at the debt levels. Those are more or less the ones that we put focus on,” he explained with utmost clarity.
Mark Mobius also made it clear that good corporate governance is a non-negotiable factor.
“Companies that do not have good corporate governance should be avoided,” he said in a stern tone.
“You get a sense of companies when you speak to the managing director, the people that control the company about their attitude towards investors. If their attitude is that investors are secondary to our orientation, then you do not want to invest. It is really about corporate governance at the end of the day,” he added.
This advice resonates very well with us given the colossal sums of money that we have lost in the recent past by trusting “Chor” managements.
Which stocks qualify to buy as per Mark Mobius’ stock-picking filters?
The difficult question as to which stocks qualify the stringent filters set up by Mark Mobius is answered by Rahul Oberoi, an intrepid reporter with ET.
Rahul Oberoi has claimed that only three stocks make the cut.
These are Coal India, Sonata Software and NMDC.
All three stocks are well-known powerhouses.
Sonata Software, a mid-cap tech stock, is chugging along quite nicely on the back of impressive operational performance.
Srikar Reddy, its MD & CEO stated that the margins in the domestic business have seen steady growth of 10-15% and that similar momentum is expected in the international business.
Look for good IT midcap stocks which have significant earnings from digital contracts. For example – zensar tech, l&t infotech, mindtree, sonata Software. These look very promising for 2020. Accenture Q1FY20 result proves it…@ZeeBusinesss https://t.co/jNtoOPKcQT
— Kushal Gupta (@KushalGupta44) December 20, 2019
#OnCNBCTV18 |Srikar Reddy, MD & CEO, Sonata Software tells @latha_venkatesh & @_soniashenoy that gross #margins in domestic business have seen steady growth of 10-15%; Adds that international business will continue to see similar momentum in #H2 @Reematendulkar pic.twitter.com/YTcKIW4Qrq
— CNBC-TV18 News (@CNBCTV18News) November 25, 2019
According to Rahul Oberoi, Sonata Software boasts off a hefty RoCE of 48 per cent in FY19 and 40 per cent in FY18.
The stock is recommended by Centrum Broking with a price target of Rs 400.
The logic is quite appealing:
“Sonata enjoys strong competency in Microsoft Dynamics and SAP hybrids. The company’s recent acquisitions (Scalable Data Systems and Sopris Systems) have further strengthened its positioning in Microsoft Dynamics offerings. We believe acceleration in organic revenue growth momentum is key to drive P/E re-rating,” Centrum stated.
Coal India and NMDC have been in the doldrums in the recent past owing to the aversion towards PSU stocks.
However, the indications are that the tide is turning in favour of these two stocks.
NMDC has been surging like a rocket over the past few days after news emerged that it has been awarded coal blocks for commercial mining.
This will be a key step towards reducing the import of coking coal.
— Pralhad Joshi (@JoshiPralhad) December 20, 2019
Yet another feather in the cap for NMDC.
The company has been allocated Tokisud North coal mine in addition to Rohne block.
While Tokisud is smaller with lower capacity and grade, it will still add Rs 462mn pa
Like Rohne, block is fully explored with all the permits
— nickey (@OnlyNickey) December 19, 2019
Raining Positives For NMDC: Calls for an upgrade
Kumaraswamy mines expansion plan approved
Chattisgarh Mines gets Extension
Ammendements to MMDR Act
Rohne mine allocation: Perfect Xmas gift
Higher domestic and international iron ore prices
— nickey (@OnlyNickey) December 18, 2019
In addition, the Andhra Pradesh government has signed an MoU with NMDC for supply of iron ore to the proposed steel plant in Kadapa, which will auger its fortunes.
The Andhra Pradesh government signed an MoU with NMDC for supply of iron ore to the proposed steel plant in Kadapa.https://t.co/atUplp9Apf
— BloombergQuint (@BloombergQuint) December 18, 2019
Motilal Oswal recently gave a ‘buy’ rating on NMDC with a price target of Rs 126.
“Most packages of the steel plant are complete. We believe the company’s steel plant would be valuable given the low-cost iron ore and economy of scale,” it said.
Coal India is also a strong contender for our money given that it is a monopoly in coal production.
It has recently been allocated 16 new coal blocks by the Government of India which improves its resource capacity substantially.
CIL to stay ahead in meeting country's energy demand.
CIL received a major boost after recent allocation of 16 new coal blocks by the Government of India. The resource capacity of CIL increased substantially as a result of this move.https://t.co/YnaeoNUUnE pic.twitter.com/35JYeblkbS
— Coal India Limited (@CoalIndiaHQ) December 22, 2019
Coal India was recommended earlier by Saurabh Mukherjea.
“I like companies that have overwhelming sustainable competitive advantages – so strong that you can almost reach out and feel them – and yet are underappreciated by the market,” Saurabh said in an article in Outlook Business, in which he gave detailed logic in support of his buy recommendation.
He did caution that there is a risk that such competitive advantages will forever be undervalued by investors, which unfortunately has come true.
According to Rahul Oberoi, Coal India is almost debt-free and has reported a consolidated RoCE of 109 per cent for FY19 and 45.50 per cent for FY18.
It also boasts of a dividend yield of over 5 per cent, which provides much-needed margin of safety.
He also pointed out that Motilal Oswal has recommended a ‘buy’ of Coal India with a price target of Rs 278.
“Over the medium term, we expect volumes to continue growing at 5-6 per cent. Besides Coal India has managed to keep costs in check on the back of productivity measures and shutting down of old mines. Ongoing efficiency measures, along with growth in volumes should drive 4 per cent adjusted Ebitda growth CAGR over FY19-21 despite a high base of FY19,” Motilal Oswal stated.