Top secret algorithm finds multibagger stocks
In February 2017, Mohnish Pabrai and Fei Li (an expert on quantitative analysis) made the sensational revelation in Forbes that they have developed an algorithm that scans the data filed by the fund managers in Form 13-F with the SEC and cherry-picks the best stocks from them.
For obvious reasons, the algorithm, which is the key to endless wealth, has been kept a top secret by the duo.
However, Mohnish did share with us the five best stocks identified by the algorithm.
He called it “indexing on steroids” and opined that it would “trounce the S&P 500”.
This is indexing -on steroids! It's the Shameless Cloning Index :-). Likely to trounce the S&P 500 in the years ahead. https://t.co/bPM3q9VfI4
— Mohnish Pabrai (@MohnishPabrai) February 24, 2017
Mohnish thereafter teamed up with another expert in quantitative analysis named Yingzhuo Zhao and homed in on “uber cannibal” stocks.
Mohnish and Zhao explained that these so-called “cannibal” stocks are cash-rich and undervalued businesses that are consistently buying back shares.
The process of buy back generates tremendous value for shareholders, the duo explained.
Model portfolio of “uber cannibal” stocks …
Mohnish knows that novice investors like you and me need spoon-feeding with practical examples that can be implemented in real life.
We have no interest in theoretical and academic dissertations.
So, he and Yingzhuo Zhao set the top-secret algorithm to work and homed in on five of the best “uber cannibal” stocks to buy.
These five stocks are the following:
1. Lowe’s (LOW)
2. NVR (NVR)
3. The Hackett Group (HCKT)
4. Select Comfort (SCSS)
5. Willis Lease Finance (WLFC)
Unfortunately, none of the names are familiar to us.
… outperforms S&P 500 with 30% YoY return
Mohnish Pabrai has now reported that the five “uber cannibal” stocks recommended by him and Yingzhuo Zhao have outperformed and delivered impressive gains of 30% since April 2017.
The performance of the individual stocs is as follows:
| Company | 1 year return |
| Willis Lease Finance | 53.4% |
| Select Comfort /Sleep Number Corp |
41.8% |
| NVR | 32.9% |
| Lowe’s Companies | 6.7% |
| The Hackett Group | -17.6% |
Three stocks delivered handsome gains in excess of 30% while one has disappointed.
We can gauge the extent of outperformance from the fact that the “Small Dogs of the Dow” and the S&P 500 delivered returns of 7.5% and 20.9% respectively in the same period.
In fact, a lady investor named Sonia Patel had the good sense to listen to Mohnish and Zhao and obediently follow their advice.
She invested $1,00,000 (Rs 65 lakh) in the five stocks recommended by the duo.
“As of 3/29/18, Sonia’s $100k was worth $130,646 (after trading costs), up 30.6%. If Sonia had instead invested in the S&P 500 over that period, she would be up 20.9% and her portfolio would be worth approx. $10k less, or $120,907,” Mohnish has stated with understandable pride in his voice.
In real terms, the outperformance of $10K is about Rs. 6.50 lakh, which is quite a hefty sum.
New Model Portfolio for FY 2018-19
Mohnish and Zhao have now recommended the following five stocks for FY 2018 – 2019:
1. Sleep Number Corp. (SNBR)
2. Corning Inc. (GLW)
3. PulteGroup (PHM)
4. Discover Financial Services (DFS)
5. Lear Corp. (LEA)
Sleep Number Corp (earlier known as ‘Select Comfort’) delivered an impressive gain of 42% in FY 2017-18. It has been allowed to retain its place.
However, the other four stocks have been shown the door.
With regard to the three winner stocks which have given hefty gains, Mohnish has advised that they be sold after 366 days of holding so that (presumably) the capital gains become tax-free.
As regards the losing stock, Mohnish has advised that it be sold within 364 days of holding so that the losses can be claimed as a deduction.
What about a model portfolio of Indian stocks?
Mohnish’s army of followers rightly reminded him that he is also duty bound to recommend stocks for his numerous fans in India especially given that he has raked in a mammoth fortune from Indian stocks.
It’s Uber Cannibals draft season! Check out the 2018 – 2019 Uber Cannibal picks here: https://t.co/0UEgrKz0tf
— Mohnish Pabrai (@MohnishPabrai) March 30, 2018
Sir anything for Indian market ?
— Nishit Shah (@nishitshah6585) March 30, 2018
Sir please provide Ola Cannibals for Indian markets too
— Jeet Maheshwari (@JEet_InD) March 30, 2018
However, in fairness, it must be noted that Mohnish has discharged his obligation by recommending three high-quality stocks on the occasion of Diwali 2017.
“My bet would be they would be materially higher a year from now than they are today,” Mohnish had then said.
So far, the three stocks recommended by Mohnish are notching up gains slowly and steadily.
Of course, another recommendation is due from Mohnish given that considerable time has elapsed since the last.
Mohnish Pabrai’s Latest Stock Pick: Healthcare Global Enterprises Ltd
Mohnish has been secretly buying large chunks of a little-known small-cap company named ‘Healthcare Global Enterprises Ltd’.
According to the latest disclosure (pdf) filed by Mohnish with the BSE, three of his funds collectively hold 43,56,390 shares of Healthcare Global, comprising of 5.01% of its equity capital.
The investment is worth Rs. 128 crore at the CMP of Rs. 294.
Pabrai Investment Fund has increased stake in Healthcare Global Enterprises Ltd from 4.9332% to 5.0128% by acquiring 69,176 shares (0.0796%) from open market on 26-03-2018 as per latest filing. @MohnishPabrai
Link: https://t.co/cySXAPFLB6
— Rohan Gala (@RohanG90) March 28, 2018
| HEALTHCARE GLOBAL ENTERPRISES LTD – KEY FUNDAMENTALS | |||
| PARAMETER | VALUES | ||
| MARKET CAP | (Rs CR) | 2,545 | |
| EPS – TTM | (Rs) | [*S] | 2.76 |
| P/E RATIO | (X) | [*S] | 106.12 |
| FACE VALUE | (Rs) | 10 | |
| LATEST DIVIDEND | (%) | – | |
| LATEST DIVIDEND DATE | – | ||
| DIVIDEND YIELD | (%) | 0.00 | |
| BOOK VALUE / SHARE | (Rs) | [*S] | 68.69 |
| P/B RATIO | (Rs) | [*S] | 4.26 |
[*C] Consolidated [*S] Standalone
| HEALTHCARE GLOBAL ENTERPRISES LTD – FINANCIAL RESULTS | |||
| PARTICULARS (Rs CR) | DEC 2017 | DEC 2016 | % CHG |
| NET SALES | 206.26 | 176.15 | 17.09 |
| OTHER INCOME | 6.06 | 1.7 | 256.47 |
| TOTAL INCOME | 212.32 | 177.85 | 19.38 |
| TOTAL EXPENSES | 180.19 | 150.15 | 20.01 |
| OPERATING PROFIT | 32.13 | 27.7 | 15.99 |
| NET PROFIT | 1.2 | 5.04 | -76.19 |
| EQUITY CAPITAL | 86.88 | 85.08 | – |
(Source: Business Standard)
Healthcare Global Enterprises is a “solid growth story”: Experts
I had never heard of Healthcare Global Enterprises until now.
However, the stock is a favourite amongst well known brokerages and mutual funds.
Goldman Sachs has recommended a buy of Healthcare Global on the basis that it has “pricing power”, “good management track record” and is a “solid growth story”.
“We gain more confidence that HCG will maintain EBITDA growth pace based on upcoming capacity and pricing power,” Goldman Sachs said.
ICICI-Direct has succinctly explained the business model of HCG in the following words:
“Cancer treatment focused business model…
We met the management of Healthcare Global Enterprises (HCG), a leading cancer care hospital chain, to understand its unique model of single speciality focus (cancer care) and its future plans. HCG was started by Dr BS Ajaikumar in 2005. The company initially established 10 cancer centres with private funding. Currently, it operates 24 HCG facilities (18 cancer centres, two multi-speciality hospitals, three diagnostics and one-day care chemotherapy centre). HCG owns 1364 beds and a team of 200+ oncologists (FY17).
Currently, Karnataka, Gujarat regions comprise ~75% of overall revenues. However, going ahead, with growth in the new centres (currently contribute 9% of revenues), the management expects the geographical mix to change.
Average revenue per operating bed (ARPOB) per day for HCG centre was at Rs 29122 in FY17. In 2013, the company entered the fertility segment by acquiring a 50.1% stake in BACC Healthcare, founded by Dr Kamini Rao, which operates seven fertility centres under the Milann brand in Bangalore. Cancer care, fertility segment accounted for 92%, 8% of FY17 revenues, respectively.
Follows local tie-up to set up new centre
Cancer treatment requires multiple patient visits to centres. Its treatment tenure is generally longer than other major therapies. Over the years, the company has followed a strategy of tapping local oncologists to set up a cancer centre. Each cancer centre offers comprehensive cancer diagnosis and treatment services including radiation, medical oncology & surgical treatment.
It follows a partnership model (with HCG holding majority stake). This also helps it achieve faster ramp up in newer centres. As per management, a new HCG centre requires Rs 45-60 crore of capex of which 45-60% account for equipment costs, which is leased by the vendor and is paid by the centre after three years of equipment purchase. Hence, upfront outgo is only Rs 15-20 crore to put up a HCG centre. Each centre typically has eight to nine doctors and two to three physicians. HCG plans to increase its cancer centres to 25 (from 18 in FY17).
Margins to improve further, going ahead
HCG’s centre of excellence at Bangalore (32% of overall revenues) registered EBITDA margins of 26.5% in FY17 (HCG blended FY17 margins- 15%) mainly due to its focus on high end healthcare services (robotics, tomography, etc) higher maturity vis-à-vis other HCG centres and better patient mix (medical tourists comprise 20% of overall centre of excellence patients at Bangalore). Going ahead, the management expects new hospitals to move to 22-24% EBITDA margins due to operational efficiencies.
Management to focus on asset light model
Focus on a single speciality and opening of newer centres on a partnership model with reputed doctors, typically leads to a breakeven of ~12-18 months for each HCG centre.
HCG also owns and operates two cyclotrons, which are used to produce nuclear medicine to cater to its own 13+ CT-PET scanners (FY17) as well as supplying the same to third party scanners.
Going ahead, the management is keen on setting up new HCG and Milann centres in high growth markets and also, expand into Africa through its existing collaboration with CDC, UK.
The management has guided for a capex of Rs 200 crore in FY18. Gross debt was at Rs 442 crore in FY17 of which vendor debt is Rs 196 crore.
The stock is currently trading at ~24x FY17 EV/EBITDA and 3.6x FY17 EV/sales.”
A similar sentiment has been expressed by HDFC Securities and Edelweiss.
Will Healthcare Global Enterprises be a 10-bagger like Rain Industries?
It is obvious that our deep interest in Mohnish Pabrai’s stock picks is because Rain Industries blossomed into a mind-boggling 10-bagger before our very eyes.
Also, Mohnish has repeatedly proclaimed that he is not interested in buying any stock which does not have at least a 5-bagger potential.
Prima facie, Healthcare Global Enterprises does appear to have the potential to give multibagger gains given the niche area in which it is operating and the huge scope of opportunity.
However, only time will tell whether the stock is in fact able to live up to the lofty expectations reposed in it!
Not a fan of healthcare stocks.This is one sector we don’t wish that revenues grow exponentially.The same may be said of pharma.Atleast that would be cutting edge research for preventive care.We don’t want hospitals to look into EBITDA when they treat a cancer patient.These should be affordable care for all.
No way to be treated as a potential multibagger in terms of stock price.
I agree. I felt uncomfortable reading this report. It felt like the business model is squeezing money from helpless dying people.
Trading volumes are extremely thin both on NSE and BSE. Just 98 Nos Buy/Sell on BSE and 11000 on NSE. No way one can get to buy decent amount of stock. No use of this recommendation to retail investors.
Revenue growth is depending on new hospital coming on stream, which required Hugh CAPEX.
Even the maintenance capex is 25cr (approx.), which is equal to the PAT for last year. On a PAT of 25cr, it will take the company years to reduce debt, assuming they do not increase the debt considerably in future (which the management has not alluded to).
I have read the management presentation/con-call and the management is constantly referring to Harvard Report (Social Proof), which is great, because they are doing great service to many people by performing same operations which would have taken many people multiple times that amount in developed countries. However, as an investor, I think the stock is trading at rich valuation (PE > 100) and I find it very hard to imagine the significant long-term return on it. I am sure Monish Pabrai is seeing the world differently than me, otherwise, he would not have bought the stock.