Sunday Thoughts on Lessons We Have Learnt in the last few days in Stock Marketing

Posted by Beena on June 20th, 2022

1) Don’t buy stock after looking at the fall from recent highs: We all have seen many stocks moving higher with technical breakouts and all in good time but when earnings are in question or issues in forensics, stock prices will fizzle sooner or later. There are many stocks which are down 20-60% or even more from recent highs & We can tell you many will NOT recover as there is a big question market on earnings quality. So, the 1st rule – WE WILL NOT BUY A STOCK BECAUSE IT HAS FALLEN XXX % FROM RECENT HIGHS. We have seen many saying that this stock is down over 50% and near 52-week low – so good to invest. No please. No. Keep earnings and management quality ahead always.

2) Buying Cheap can be Very Expensive: We have many focusing only on PE and buying stocks in the sector which are less than 10x or 5x without understanding about the management, product, balance sheet, cash flows. We had burnt our hands in Jubilant Pharma and the stock was trading at 10x when we bought but we were wrong in the cycle & management execution skills. Even after fall of nearly 60% - stock is now at 13x TTM earnings. Hence, earnings remain the most imp factor and not PE always. Many people tell us that industrials/ manufacturing companies are expensive, but they have management + tailwind and execution track record which will keep them buoyant (Thermax, SKF, Kennametal, Craftsman, HAL, BDL, Rolex, Gokex for example)

3) Management quality + Strong Sector tailwinds + GARP (growth at reasonable price): buying only a strong quality management does not make money if the sector is not having tailwinds. You could have any greatest pharma company in the last 2 year and yet lost money. So, it is important to have both at reasonable price. Biggest sector which has strongest tailwinds is clearly manufacturing sector in India. It is not a commodity sector and need high technological prowess with tight working capital skills & exemplary track record – if not – no client will connect for longer tenure.

4) Global Cues: Clearly world weakness is due to global reasons and recession fears. Some recent data points in US like Luxury-Home Sales, U.S. housing starts and US Retail sales – have weakened. Metal prices started to cool off and are down 20-40% from recent highs. Crude fell 9% last week - 1st weekly decline after 8 weeks of gains. Excesses/ leverage are rushing to the cleaners - Bitcoin dropped below ,800 from ,789.63 in November.

5) It is time to focus on Micros and not Macros: We remember during covid when again no one had any answers to what will happen and next day market opening was like a bad dream to everyone – only one thing that came to rescue was valuations. Many companies came below their replacement cost. Ultimately, all negatives get built into valuations like it happens on the upside as well. Right now, FY22/23/24 Nifty EPS estimate are 712/828/955. So, even if you give 20x FY24 Nifty EPS, Nifty should be around 19,000 going ahead. There are many companies where capex is done over last 3-5 years, no debt, no capex in future, and have strong order book for next 2-3 years – operating leverage will be huge in these cos once demand returns (question is only timing), but it will happen.

6) Asset Allocation is the Key: during good times – everyone forgets about asset allocation. But, right asset allocation can keep portfolio strong over period of time. Nearly 80% of your portfolio should be in very strong companies backed by strong fundamentals and management.

Concluding Thoughts: No one knows anything. But, We are sure that when everyone forgets about earnings & only focuses on technical levels – it is time to put heads down and study to find next big winners which will happens over time and not in days/ weeks/ months. Money making will not be easy in this phase but not impossible either. Risk – reward is favorable to invest if one can hold for even 6 months without seeing screen and TV channels daily. Great businesses will survive and have survived over last 20-30 years and thrived. Focus on great businesses.

Stay humble in markets and learn...Kill Ego, admit mistakes, cut losers, and move on to better and solid businesses.