Never sell “phenomenal businesses”, they become 100-baggers
A few days ago, Ramesh Damani rapped us on the knuckles for our itch to “book profits”.
“If you really want to make money you have to invest in a business for long periods of time … Great businesses are built of great value over a long period of time. They keep compounding,” he said.
“Great ideas are very rare and if you get a good idea you need to hold on to those great ideas see them flower into great businesses over period of time,” he emphasized.
However, the baffling aspect is that the temptation to book profits is not confined to novices. Even expert investors with deep understanding of business fundamentals succumb to the temptation.
In his latest interview, Sumeet Nagar of Malabar Investments candidly confessed that he committed the cardinal mistake of prematurely dumping two mega-bagger stocks, namely, Page Industries and Bajaj Finance.
The reason he dumped the two stocks is because he thought they were “overvalued”.
Today, it seems laughable that anyone could regard powerhouses like Page Industry and Bajaj Finance to be overvalued given that they have just started on their multibagger journey.
Thankfully, Summet Nagar realized his mistake before further damage was done.
He dived back into both stocks without wasting a minute.
“Once we realised that mistake, we got back in. It was a mistake to get out early,” he said with a sheepish smile.
Needless to say, the decision was very sensible indeed because Page Industries has now blossomed into a magnificent 100-bagger.
— CNBC-TV18 News (@CNBCTV18News) August 28, 2018
According to experts, Bajaj Finance is also on the way to posting 100-bagger gains shortly and delighting its investors.
Anyway, the important lesson that Sumeet Nagar learnt from the experience is that one should never even think of selling stocks with “phenomenal franchises run by terrific management teams”.
“When you find those great businesses with long run growth, where your moat can keep expanding over a period of time, you should hold tight through that high valuation. It will still keep creating value,” he emphasized.
Avoid cyclical and commodity stocks like the plague
Some novices have developed a penchant for cyclical and commodity stocks.
One can see them in the back alleys of Dalal Street vehemently debating the prospects of esoteric commodity stocks like Graphite, Sugar, Steel, Cement etc
Prima facie, the novices are committing a blunder because commodity stocks have been declared to be no-fly zone for us by the dictates of the eminent Gurus.
Sumeet Nagat reiterated the warning of the Gurus.
He made it explicit that commodities and cyclical stocks are an absolute no-no for him.
He explained that these stocks don’t fit into his investment philosophy because one can never predict with confidence where these stocks will be over the next three years and five years.
It is obvious that no prudent investor will invest in a business which suffers from extreme cyclicality and unpredictability.
Buy small-cap and mid-cap stocks growing at 20-25% + year on year
Sumeet Nagar opined that there are great opportunities in small and midcap stocks which have “fallen off the cliff” and are available at bargain-basement valuations now.
He advised that we have to stop worrying about market fluctuations and instead grab these stocks without further delay.
“If you have companies that can compound their earnings at significantly above market average growth which means 20-25% plus year on year and they can do that even through the turmoils in the market or because of the macro situation, I do not think you should worry too much about where the market is heading,” he stated.
“If these companies are able to compound their earnings at that high enough rate, markets will reward you for that,” he assured in a soothing tone.
Examples of stocks with “phenomenal franchises run by terrific management teams”
Nikunj Dalmia has the skill to steer his guests to talk about specific stocks instead of meandering in theory.
He point-blank asked Sumeet Nagar what he is buying now, knowing that this will also provide examples of “phenomenal franchises run by terrific management teams”.
Sumeet named two stocks:
(i) Safari Industries – can easily become 10x, 15x, 20x bagger:
Sumeet Nagar is one of the original discoverers of Safari’s multibagger potential.
He provided a masterful explanation about how Safari Industries is a proxy for the growth of the middle class in India and how its top-management (which is ex-VIP Industries) knows all the tricks of the trade.
Safari Ind up 40% in one month… Sumeet Nagar spoke about the rationale for owning Safari, and his bullishness on the luggage space exactly 40 days ago on #AlphaMoguls … worth listening to this https://t.co/cy2EScnAZ8
— Niraj Shah (@_nirajshah) April 19, 2018
— Outlook Business (@OutlookBusiness) June 28, 2018
Needless to say, he has been richly rewarded for his brilliant stock-picking.
Is Safari Industries expensive now or still a bargain buy?
Naturally, the question arises in the minds of novices whether after the spectacular run up, the stock is now quoting at expensive valuations or is still a bargain buy.
Sumeet Nagar opined that it is frivolous to value powerhouses like Safari on the basis of their P/E.
He pointed out that the entire luggage industry is doing very well and within that, Safari is gaining market share by virtue of being the third largest player.
He also emphasized that increasing size brings in the benefits of operating leverage.
“They are expensive if you just look at trailing numbers but if you see the level of growth and scalability, these companies can easily become 10 times, 15 times, 20 times the size of where they are today. Given that potential. they are still fairly small,” he said with a big smile on his face.
(2) Vaibhav Global – terrific management theme:
Sumeet Nagar showered rich praise on Vaibhav Global. He described it a company with a “terrific management theme”.
He pointed out that the Company is very focussed on creating an opportunity and that what it has been able to do is “nothing short of phenomenal”.
“To be in that business in the US where there are only a handful of people, maybe four or five people who have been able to create businesses of that size despite huge barriers to entry. It is amazing,” he added.
He also pointed out that Vaibhav Global enjoys “tremendous operating leverage” and that over the last one year, its’ earnings have more than doubled.
It will also benefit from the steep depreciation in the rupee.
Stocks which are no longer in favour
Sadly, Sumeet Nagar gave the thumbs down to three stocks and revealed that they are no longer in his buy list.
(i) Avanti Feeds – victim of cyclical downturn:
In an earlier piece, I had pointed out how Sumeet Nagar had brilliantly raked in massive 10-bagger gains by timing his entry into, and exit from, Avanti Feeds brilliantly.
He dived into the stock when it was at the bottom of the cycle and bailed out when it was at the peak (see Sumeet Nagar’s Malabar Investments Pockets 1000% Gain & Escapes Melt-Down In Stock)
“Avanti is at a cyclical downturn … The challenge with Avanti was that on peak margins, people were willing to give it peak multiples … this notion of peak earnings or peak margins and peak multiples on top of that it usually does not end well,” Sumeet explained.
However, he did give a clean chit to the management and advised that if the stock price plunges further, it may again become a bargain buy.
(ii) Cholamandalam – lack of clarity on leadership front
Sumeet revealed that the departure of Vellayan Subbiah from the post of head honcho of Chola has spooked him to some extent.
“Part of our thesis on Chola was the leadership of Vellayan and with that changing, the thesis changes a bit. On the leadership front, there is still a lack of clarity,” he said.
He did, however, clarify that the “business is still pretty good” and there is no need for investors to panic and dump the stock.
(iii) Eicher Motors – challenges are there, growth has come off:
Sonia Shenoy sounded the death knell for Eicher Motors by emphasizing that it is consistently reporting weak sales which indicate that its days of glory are over.
Very weak sales from @royalenfield
Lowest sales since August 2017
ROYAL ENFIELD sales up 7% yoy at 69063 in July, growth rates slow down
Royal enfield sales down 7.3% mom
— Sonia Shenoy (@_soniashenoy) August 2, 2018
Grossly over rated product as well as the stock… soon come down to earthy level
— Parthapratim Khan (@ParthapratimKh3) August 2, 2018
Eicher Motors at day's low – stock has corrected nearly 15% from its all time high
— Varinder Bansal (@varinder_bansal) January 9, 2018
However, Porinju paid tribute to Eicher Motors by recalling its stellar contribution of the past.
Smart investors in India have created massive welath in small & mid-caps. Eicher Motors was a small-cap few years ago, became a mid-cap recently and now graduated to large-cap!
— Porinju Veliyath (@porinju) June 8, 2018
CS on Eicher Motors
Upgrade to NEUTRAL as val now reasonable at 22x FY20
Deserves premium over other 2W OEMs
Could react +vely in near term to better monthly sales but medium term
performance contingent on success of new launches
Tweak EPS by 1%; TP Rs 27000@_soniashenoy
— Nimesh Shah (@nimeshscnbc) August 10, 2018
Sumeet Nagar made it clear that he is holding his horses at this stage and is unclear on what his stance should be.
“The challenges are there, the growth has obviously come off. Obviously, the kind of growth that they were seeing in the past is tough to do on a fast enough pace,” he said, implying that he will not hesitate to pull the trigger and dump the stock if it does not get its act in order soon.