Prof. Sanjay Bakshi’s stock picks show that he remains true to his philosophy that investors should only buy top-quality stocks even if they have to pay a premium for them instead of messing around with so-called “cheap” stocks.
In his articles, “Pay Up, But Don’t Overpay” and “What Happens When You Don’t Buy Quality?; And What Happens When You Do?”, Prof. Bakshi argued convincingly that investors who bought quality stocks like Nestle, Asian Paints, Colgate, ITC, Bosch, etc, even at high PEs, made a lot of money over the years because these companies are able to weather all storms and overpower their competitors.
Relaxo Footwears, Bakshi’s last stock pick is an example of that. Relaxo Footwears has an established track record of great success in the market place. The fact that it has already been a super-duper multibagger did not deter him from recommending it.
Prof. Bakshi’s latest stock pick, Thomas Cook, is of the same mould. An established business model, top quality management and reasonable valuations. Lets see what it is about Thomas Cook that has captured Sanjay Bakshi’s attention:
(i) Established business model: Thomas Cook is India’s largest, fully integrated and highly profitable Foreign Exchange and Travel Operator;
(ii) Profitable business: Since Thomas Cook went public 30 years ago, it has never suffered a loss or skipped dividend. Thomas Cook’s revenue and EBIT have grown at a CAGR of 16% and 14% respectively over last 10 years. It had a revenue decline in only 3 years;
(iii) Dominant market share: Thomas Cook has a stranglehold of more than 50% of the foreign currency business in India;
(iv) Huge prospects ahead: The increasingly prosperous and burgeoning middle class with a propensity to travel to foreign countries means that the potential is unlimited for Thomas Cook;
(v) Prem Watsa is in charge: Legendary investor Prem Watsa’s company Fairfax Financial Holdings has taken over Thomas Cook. Fairfax has a solid track record of delivering a 22.7% CAGR in book value and 19% CAGR in stock price over last 27 years.
Prem Watsa explained his liking for Thomas Cook in succinct words:
“You will understand the great growth potential of this company when you realize that currently only one million Indians annually travel outside India for holidays. This compares to some 40 million outbound tourists in China and hundreds of millions of outbound tourists in the western world.”
Prof. Bakshi points out that Prem Watsa is already starting to work his magic on Thomas Cook. Fairfax has started the process of monetizing the real estate assets of Thomas Cook. Also the top management are being induced to deliver cash flow earnings instead of just accounting earnings.
The proof of the pudding is in the eating: The top brass of Thomas Cook, namely, the CEO and the Chairman, are buying stock from the market for their personal account, points out Bakshi.
The other important point that Sanjay Bakshi makes is that the valuations of Thomas Cook are not very expensive. Prem Watsa paid about Rs. 52 pre share. When Bakshi wrote the report, the price was Rs. 55. Today’s price is about Rs. 78, about 40% higher than when Bakshi recommended. However, given the multi-year opportunity that Thomas Cook offers, it may not be too late to take a bite.