I see a lot of stocks in core compounder that are at best cyclical businesses. A compounding businesses has three main characteristics that are repeated over the years regardless of anything: 1)stable top and bottom line growth 2) stable margins 3) long term upwards trending pricing chart.
Trent, Nestle, Titan, HDFC banks to me are good examples of compounders. You can buy into these companies at any point in time regardless of valuations, economic cycles or general mood of markets, and still compound wealth at 15-20% over a long period of time. They have great underlying business model, a tangible moat and high quality management with great track record.
Calling some of the companies, whose businesses and stock prices have done nothing except post-covid, compounders will be a leap of faith. Also it’s hard to distinguish a compounding stock from the rest in a scorching bull run, we have seen post co-vid, where every single stock runs and market cares least about quality of books, management or underlying businesses. Narrative about every second company is so good that it leads common investor to believe that nothing can go wrong.
To me a good judge for a compounding business is if one can see themselves staying invested in a company for next 10 years and being confident of maintaining their returns.
I’d love to see how many of some of these small/micro-caps are still around in next 4-5 years and if they are still generating wealth. I’m sure 1-2 of them will become large caps or compounders but I don’t see any of them coming from real estate, chemical or pharma space. It hasn’t happened in the history so very less chance will happen in the future.
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