Lucky escape from meltdown in “two underwear” stock
Page Industries suffered the ignominy of being described as a “two underwear” stock by Porinju Veliyath.
“Page is over-priced unless govt makes it compulsory to wear 2 underwears, like superman,” Porinju said in a jocular tone, implying that the stock is hopelessly overpriced.
Good, reliable numbers from Page. The bulls still have their underwear on them. Thank God for sparing us an ugly sight.
— Shyam Sekhar (@shyamsek) August 14, 2015
Page is over-priced unless govt makes it compulsory to wear 2 underwears, like superman 🙂 https://t.co/OVTovP99Lq
— Porinju Veliyath (@porinju) August 14, 2015
— Shyam Sekhar (@shyamsek) August 14, 2015
However, Porinju had to eat humble pie later because Page Industries defied the odds and surged like a rocket, posting magnificent multibagger gains (see “Two Underwears Stock” Gives 7500% Gain & Proves Veracity Of Basant Maheshwari’s Crusade Against “Chakri Stocks”).
Presently, Porinju’s prophecy has come true because Page’s exorbitant valuations have caught up with it and it is suffering a meltdown.
— ET NOW (@ETNOWlive) May 27, 2019
In fact, it appears that owing to the slowdown in the economy, the public has stopped buying new innerwear.
— lalljee (@klalljee) June 3, 2019
Sumeet Nagar heaved a sigh of relief that he got out of the stock in the nick of time and did not get trampled in the stampede.
“We are value investors. When we think that company should trade at lofty valuations and were under reasonable future scenario, and then you don’t see generating very good returns, that’s the time you start trimming, irrespective of how the company is doing. That’s the reason we have exited from Page as valuations have become too high. This notion of getting off before others come and there is a stampede. I don’t think it is something we follow. Some people do it very well. Stay in the momentum, until you saw some faltering and you get out before everybody else,” he explained.
The one investing parameter Malabar Investments' Sumeet Nagar swears by…
— BloombergQuint (@BloombergQuint) June 8, 2019
Earlier, Sumeet Nagar escaped meltdown in Avanti Feeds
Avanti Feeds was at one time the favourite of the cognoscenti.
The stock was also recommended by Sumeet Nagar as an example of a case where investors are so obsessed with the risks that they lose sight of the opportunities.
“People were very concerned about the risk in this business and they never looked at the opportunity … Those are the places where you have the potential to generate significant returns. For many years they have been growing at 50% year-on-year with ROEs north of 50% and yet people continue to ignore them,” he explained.
However, he correctly sensed that the cycle was turning and that the stock is heading for doom.
He encashed his massive 10-bagger gains from the stock and bolted in the nick of time (See Sumeet Nagar’s Malabar Investments Pockets 1000% Gain & Escapes Melt-Down In Stock).
Lessons learnt from fiascos of Page Industries and Avanti Feeds – Avoid buying stocks quoting at exorbitant valuation
“Exorbitant premiums are never a good recipe for generating good returns. If you are invested in a company which is trading at very high multiples, then it is tough to generate returns from there because those exorbitant premiums will go away in a period of time,” Sumeet explained, distilling the wisdom derived from practical experience.
“For many consumer companies, the growth rate is also not high enough. That risk reward is not attractive …. When a company starts trading at 80-90 trailing P/E, then it is not a good investment anymore. It is still a great company, but it is not a good investment,” he added.
He pointed out that investors tend to extrapolate the high earnings and assume that it will continue forever.
“In case of many other consumer companies, where the valuations went so far ahead of themselves and the underlying growth could not sustain with them. Because there is assumption that high level of growth will continue forever, if you see any faltering of that growth then it brings that thesis into question. If you are investing in those names at very high valuations, the risk reward is not very favourable. You have to be so sure that this earnings growth will remain for a long period of time“.
“We were earliest investor in Page industries in more than 10 years ago. At that time, it was trading at 10-11 times trailing P/E. At that point of time, it was growing at 40-60 percent year-on-year. As they continue to deliver, people’s willingness to pay has kept on increasing. People say that it is long runway for growth and pay a little bit today. But that can go too far,” he said.
Err on the side of caution and dump high P/E stocks at first sign of slowdown
Sumeet explained that in the case of stocks which are priced to perfection and quoting at very high multiples, it is prudent to err on the side of caution and exit at the first sign that growth is faltering.
“We never lose money by doing it,” he said simply.
Safari Industries is still a good buy
It may be recalled that Sumeet Nagar had earlier come out with all guns blazing in favour of Safari Industries, the manufacturer of luggage.
He explained that Safari Industries is a proxy for the growth of the middle class in India and 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
Sumeet reiterated the same theme in his latest interview.
He pointed out that India has the largest stock of two wheelers in the world (200-250 million) and that riders have to perforce carry a backpack.
“There are 250 million scooters and motorcycle out there. Only 7 million branded backpacks are being sold. So, you can do the math. There is a lot of room for that to grow,” he said.
He also pointed out that unlike luggage, backpack are used heavily every day and tend to wear off. They require to be periodically replaced.
This creates a big market with lots of opportunities for branded players like Safari Industries.
Latest stock pick: Affle – IPO is coming
Sumeet revealed that his latest stock pick is an unlisted company named ‘Affle‘.
According to the website, Affle is a “Consumer Intelligence Driven Mobile Marketing Platform“.
Sumeet explained that Affle is a leader in internet advertising.
He pointed out that advertisers are keen to advertise heavily on the digital media and through mobile phones.
“India is one of the fastest growing advertising markets in the world …. digital advertising in India is growing at 30 percent year-on-year …. in India more people are spending time on mobile and mobile becomes a primary source of internet connection …. Mobile phone is the most expensive real estate in the world, because more and more commerce and transaction will happen through that and so whoever is going to get on that is very valuable to the companies and people are willing to pay money for that and this is where Affle sets in“, he said.
Sumeet also stated that Affle is already the largest player in India and is also growing internationally.
“Its Already a profitable company, 100 percent return on capital and keeps growing at a perfect rate. I think this past year they have grown earnings by 70-80 percent. So, it’s a phenomenal company and run by great management theme. They should likely come up with an IPO before end of the year. It is a fantastic company that we liked and we invested in it“.
It is obvious that we will have to keep our eyes peeled for Affle’s IPO and grab it with no holds barred!