Vijay Kedia rightly describes himself as “An opportunist in the so called ‘Bull & Bear’ market”. As a true stock picker, Vijay Kedia has no prejudices against any particular sector or set of stocks. He is happy to buy any stock from any sector if he is satisfied that (i) he understands the business, (ii) there is sufficient margin of safety and (iii) there is potential for a reasonable gain.
Vijay Kedia announced his latest stock pick in his customary low-key manner:
@freemanrodrigue GMDC looks cheap to me. But do your homework. I have vested interests in it.
— Vijay Kedia (@VijayKedia1) November 19, 2015
(GMDC looks cheap to me. But do your homework. I have vested interests in it)
A slight probe reveals the reason for Vijay Kedia’s attraction to Gujarat Mineral Development Corporation (GMDC).
GMDC is presently at the bottom of the barrel. The slowdown in the minerals and commodities space has taken its toll on the Company. On a YoY basis, the stock has lost 38%. On a two year basis, the stock has lost 15%.
However, it cannot be denied that the stock is cheap. The P/E is 5.97 while the P/BV is 0.84. The stock also carries a dividend yield of 3.51%.
What everyone has missed out is that there is a dramatic event that has taken place, which will lead to a quantum jump in GMDC’s turnover and profitability.
Prem Kumar Gera, GMDC’s MD, revealed that the Company has done away with the age-old rule of restricting the sale of lignite only to end users (after inspecting their premises) and has decided to sell lignite to anyone who is interested in buying it.
Prem Kumar Gera called this decision a “major reform”. He added that this decision would lead to incremental revenue of about 25% because all parties who are presently compelled to use coal will now shift to using lignite.
At this stage, we must note the words of wisdom of Sanjay Dutt of Quantum Securities. He pointed out that the manner in which the economy is shaping up suggests that the time is ripe to turn contrarian and buy the beaten down metal stocks. He said:
“This is a time to buy select soft commodity plays including metal stocks because you do not buy them when they are trading at 8 or 10 multiples. That is the time to sell them. You buy them when they are trading at low multiples for a time probably because earnings are under pressure and, as and when, we see recovery in a quarter or two, then we will see how the entire EV/EBITDA equation starts changing. So we are positioning ourselves for that fair enough.”
He also added:
“With the interest rate cycle turning up, we definitely think there are first signs and investors like us will look at a little bit of more risky trades. So obviously, we try to kind of game the trend, game the cycle before it actually gets in. If you really want those 2x, 5x, 10x gains in two years, then you got to be confident at times and understand whether the cycle is changing or not. In my view what you are seeing a dip you in stock prices, which is giving an opportunity to buy into. For now, I do not see any problem in India, barring any major crisis that may hit the world.”
So, Sanjay Dutt’s advice is crystal clear. If you really want 2x, 5x, 10x returns on your investment, you have to be a brave heart and buy the contrarian stocks, which is exactly what Vijay Kedia has done. Whether Vijay Kedia will indeed make the 2x etc returns requires to be watched closely!
Actually the mkt folklore goes that you buy commodity/cyclical stocks at high p/e multiples i.e when the earnings(e) have collapsed in the p/e ratio. That typically is around the bottom of the cycle. Recent Eg. CV co’s like Ashok Leyland about 4-5 qtrs back
Could be a good with a 2 year time span. The Enterprise Value to EBIT is 4.9. Graham number is 185. Intrinsic value is 196. The negative is that the company has delivered a poor growth of 6% over the past 5years. Sales growth over the last 3Years is negative at -4.5%.