Most of us are aware of the conventional stock picking metrics; visionary promoters, good management, scalable business and rich ratios.
Stock investor Soumya Malani suggests that investors get more specific in their hunt for alpha. The CEO of ShareBazaar App, he tweets at @insharebazaar.
Here, Malani narrows down on some patterns that investors could keep an eye on.
- Look at the negative working capital pattern.
At first blush that sounds a bit off since negative working capital would signify a company’s liabilities outweighing its assets. This puts the company in a feeble light. But that’s not what I am focusing on. Negative working capital also means the business which operates on Other People's Money, or OPM, or the suppliers money. Advances from customers is a good hint to go by.
- Companies which are leaders in a niche area and have a tiny market cap.
If you have the patience to wait for the business to grow and the market to subsequently realise its potential, you are sitting on a huge multi-bagger. This reminds me of the domestic consumption story. If one looks back at the market-cap of Cera Sanitaryware, Symphony or La Opala, it’s clear they were just too miniscule when compared to the scale they catered to, with an efficient supply chain and distribution network in place. Eventually, tailwinds prevailed, and the market catapulted them into a different orbit.
- Keep an eye on acquisitions and takeovers.
Uniply and Kingfa are cases in point, each over-30 baggers in the last 3-4 years.
In retrospect, Kingfa was a common-sense choice. This Chinese giant grew from nothing to be Asia’s largest compounder and boasted a track record of 65% CAGR for 22 long years in China. When it saw its market getting saturated in China, it acquired an Indian company (then known as Hydro S&S) by paying 3x premium to its prevailing market price. This increased the efficiency and the stock became a huge multibagger.
- Eradication of non-core diworsification.
A company could sport a sturdy and profitable core business, but owing to loss making non-core units, the overall Balance Sheet and Profit and Loss statement would be a farrago of misrepresentation. A shrewd move would be to sell those units and plough back the funds into its core business which would further accelerate growth. The market loves such stories.
- Companies that outperform during huge headwinds.
TV Today is a classic example. Barring the Aaj Tak parent, every single company in the media sector was bleeding profusely. Digitisation was a game changer with the stock becoming a 12 bagger in last 4-5 years. Find companies which are making money when others from the same sector are unable to find their feet.
- Demerger in a sizeable company.
A billion-dollar market-cap company can demerge a unit with a ratio of 20:1 share. The demerged entity, as per the ratio would quote at say $100 million which would make no sense for foreign investors. Foreign institutional investors, or FIIs, have got a market-cap stipulation and hence they tend to sell out in haste without even caring about the intrinsic value. Arvind Infra and Marico Kaya are examples of huge value creation.
- Companies eating market share of market leaders.
Amara Raja and Havells ruthlessly cannibalized on the market share of leaders such as Exide and Crompton Greaves, respectively. Fifteen years ago, they were known to none with very thinly traded volumes. The upstarts are now the numero uno players in their own space.
- Second-run companies in sectors where the leader has been a multibagger.
This is a very interesting pattern which often gets played out in different sectors. At some time, the valuation of the significant player gets so stretched that investors start to look for the trivial peer where the valuation gap is much narrower. Think Avanti-Waterbase, Relaxo-Mirza and KRBL-Chaman Lal.
- Strong leverage but very efficient in working capital management.
Often, quality niche players backed by visionary pedigrees, to conquer more ground and stay undisputed would resort to capital expenditure through long-term debt. At some time, the capex would be covered for the next 3-4 years and just the maintenance capex remains. So, all operating cash flow goes in debt repayment and net profit vaults.
- Legacy companies witnessing the induction of a new generation.
The predecessors were habituated in siphoning off aka black money but the new players at the helm, who in all probability would be freshly groomed from renowned business schools, would be inclined to look at the market cap which is pure white stuff.
It's simple math. A small-cap promoter may siphon off Rs 5 crores via unscrupulous means. On the flip side, the next generation would consider showing the same through books of accounts. That same amount would mean an extra Rs 100 crores in market cap considering a PE of 20. On even a 50% ownership they get richer by Rs 50 crores. No prizes for guessing which is a better route. Presently, I believe that this area offers serious money-making opportunities and moves likes demonetisation further reinforces my stand.
Soumya tweets @insharebazaar. You can see a few select tweets here.