Stock valuation technique
Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Equity Valuation Techniques
Forum Discription: While valuing equities no individual technique works. Mostly it is a combination of techniques. Discuss the various techniques in equity valuation ranging from PE to RoE to Market Cap
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=2114
Printed Date: 26/Jun/2024 at 10:22pm
Topic: Stock valuation technique
Posted By: manish_okhade
Subject: Stock valuation technique
Date Posted: 04/Apr/2009 at 10:02am
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In this forum i am trying present my thoughts on stock evaluation. Hoping that it will attract senior members in Investing field to comment and advise if i am wrong anywhere. Though i have greatly benefited so far using this simple technique as of now. Note that it's never been multibaggers but returns were dec ent i.e. 20-30% per annum.
There are follwoing aspects to be considered:
1) Qualitative aspect - Its based on pure understanding of business fundamentals. Sheer judgment is entirely based on one's knowledge of the associated macro factors like scalability, moat, Mgmt quality etc. Best way is to read and read and read more to be judgmental here.
2) Special situation - Like present TATA Steel, Jet airways, infrastructure companies. I find these are pure high risk calculated bets. One must put a small % of portfolio not to exceed >5-10%. Again evaluation of these companies is very tricky, yet unable to find a logical way to evaluate them , quantitatively one can but not qualitatively as again its very subjective issue.
2) Quantitative aspect - Good metrics like high RoE, Low Debt, Increasing profit margin etc to be consdered. But if we consider the business which is old and consistant in average earning (Marioco, Brittania etc) then following method helps, Brittania is considered below:
In above method its assumed that past data can be correlated to future growth (Biggest wekness of this method but works with seasoned companies well).
So if i buy Brittania at target cost of 1100-1150 then i am buying it at P/E of 9.8 in FY12 which is by any means a cheap as Brittania is assumed be never go so low in PE and it assumed to maintain its very realistic worst case EPS growth rate of modest 10% which is 4% less than last 5 yrs CAGR.
How above workes? Read below:
In past one year
So if i buy Brittania at 1100-1150 and sell it when P/E shoots to unrealistic high of 25+ then i guess i am not loosing the money.
I find above simple and pretty neat to estimate fair prise with inbuilt safety. Only thing is it fails with small cap which is exploding in P/E by 80-90% per annum like TITAN.
Moreover above investment is considered with a horizone o 3 yrs (or as rightly said short term failed investment is long term investment
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Replies:
Posted By: basant
Date Posted: 10/May/2009 at 3:22pm
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Interesting. Seems I missed this post. Actually I also employ a similar technique just that I use RoE/ RoCE as a guide to indicate whether the growth that we are assuming will come alomng or not.
Though estimating the future is risky but it is important to be approximately correct then precisely wrong.
Plus if we are analysing cyclical services we can use Dividend yield to protect the downside and RoE to indicate growth. When we get such stocks at a PE of 20% of RoE then the possibility of making money outwerighs the probabilty of losing it.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: subu76
Date Posted: 10/May/2009 at 3:50pm
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Basant Sir,
But wouldn't you expect the ROEs of cyclical companies to fluctuate wildy? After all that's what cyclical industry is all about.
My understanding is that for cyclical companies P/BV is what Graham type value investors look at.
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Posted By: subu76
Date Posted: 10/May/2009 at 3:59pm
Hi Manish,
Based on my theoretical reading:
Your preference for quality and predictability is the way to go....it's very hard to lose in these stocks if bought at reasonable p/e. You will underperform the market during bull phases but then such investors are focused on absolute returns rather than relative returns. This is the way to create long term wealth IMO.
Valuing long time businesses in non cyclical areas where there is'nt a lot of churn or new players (like say VAS is) is probabily simpler and more realistic.
One metric that you might want to add more explicitely in your studies is 10 year ROE. I think that's what you meant when you referred to earnings increasing at a consistent rate.
One point here is that Graham type value investors who really really abhor losing money (more than they want to make money) try to avoid companies with financial risk at all costs. Allmost all the folks interviewed here http://www.bengrahaminvesting.ca - http://www.bengrahaminvesting.ca say the samething.
My understanding...again based on theoretical reading is that special situation is not about companies facing a cyclical downturn..like Tisco is....that is normal business cycle. Special situation is a company facing temporary headwinds which will not have any long term impact..e.g ITC tax case, Phaneesh Murthy episode in Infosys, Reliance brother slugging it out, Brittania/Danone board room battle etc.
Another aspect (again theory) ...that you referred to somewhat tangentially...is relative valuation. How is the stock valued relative to it's peers, to the entire market in terms of p/e, p/bv,p/cash flow etc. It has been observed that for large well followed companies valuation differences are made up quicker than for smaller ones.
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Posted By: basant
Date Posted: 10/May/2009 at 4:58pm
We are buying cyclical services and not cyclical commodities. So companies that serve cyclicals do not see that kind of volatity as the cyclical comapnies themselves. Also buying a 40% RoE company at 6 times PE when the whole world has cracked up brings enough margin of error on the table and that is why we look at payout also.
Some examples of cyclical services are Voltas and Blue STar for Retail and Real estate; Thermax for Steel, Power and Cement; L&T for construction and infrastructure,
These are companies who serve the main segments and can choose to do or not to do business with any of them. ALso we look at the RoE for the last few years and take a weighted average rather then buying them on the basis of one year's RoE.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: manish_okhade
Date Posted: 10/May/2009 at 9:01pm
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Hi Subu,
"One metric that you might want to add more explicitely in your studies is 10 year ROE. I think that's what you meant when you referred to earnings increasing at a consistent rate."
10 yr RoE is fine as per WB teachings when you are looking for life time stocks. I tried this but the companies which meet this criteria are not looking very interesting to me e.g. Bharat Electronics. In USA there are many businesses who have long term clout but in India at least i find it hard to spot such types of companies. India has yet to mature in terms of having very very long term players. Isnt US democracy is 500 yr old!!!
So i focus more on 3-5 yr horizon only so not look at past 10 yr RoE but if its readiyly available the definitly good to glance.
"Another aspect (again theory) ...that you referred to somewhat tangentially...is relative valuation."
What i mean here if you try to see bargain in tough situation still good and safe stocks are not available cheap in terms of business metrics like P/E, P/B etc. so one has to look at relative past evaluation. For example Marico used to trade at P/E of 30+ in bull and in strong bear phase it came down to P/E of 20+ which is again not cheap but if your calculation for growth rate is realistic then only it looks cheap.
Thanks for sharing the url, it s good. |
Posted By: subu76
Date Posted: 10/May/2009 at 12:05pm
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Hi Manish....
Thanks for your clarifications. I think your points about the shalowness of out markets makes sense.
Do have a look into the wealth creators reports from Motilal Oswal guys. It's a great read.
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Posted By: subu76
Date Posted: 10/May/2009 at 12:12pm
Wah Basantji...a blue chip like L&T at PE around 10 is a great choice.
IMHO the L&T stock selection mirrors WB's selecton of GE.
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Posted By: prashantmohta
Date Posted: 10/May/2009 at 12:53pm
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Return on stocks will depend on earnings,dividend and dividend growth.
One must have to do blood test of management before buying any co. Ex.whole two wheeler industry is struggling and hero Honda making new highs.what more u want. If the blood is good then whenever economy revives or industry your stocks will pay u handsomely.that's why buffet says don't worry if your company doesnot show good eps in one or two year. Good management or good business will have high roe and has a habbit of paying good dividends. |
Posted By: subu76
Date Posted: 10/May/2009 at 7:24am
Also p/e expansion. This is where the relative comparision and past data is useful
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Posted By: prashantmohta
Date Posted: 10/May/2009 at 8:34am
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Pe depends on the mood of onvestors.
Actually it's depends on the expectation of dividends growth in coming years. High pe or low it wiill revert back to it's mean. |
Posted By: prashantmohta
Date Posted: 10/May/2009 at 8:53am
| Can anybody illustrate here dividend earning ratio instead of price earning ratio. |
Posted By: subu76
Date Posted: 10/May/2009 at 9:28am
A patient investor should probabily try to use this volatility to his advantage.
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Posted By: basant
Date Posted: 10/May/2009 at 9:52am
Its the same a PE Ratio adjusted for the Payout Ratio. One can find little from sych ratios in isolation unless they are coupled with the other evaluation tools.
------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: subu76
Date Posted: 20/May/2009 at 1:20pm
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IMO another criteria to add to the valuation technique is related to how low the price can go.
Will the stock become doubly attractive if the price goes down by 50%? Will i double my bet? (assuming no fundamentally new development has happened)
It's a subjective thing.
for e.g. for me one such stock is hawkins...market cap about 100 cr now...if hawkins go down by 50% i'd welcome the opportunity to double my bet. offcourse beauty lies in the eyes of the beholder.
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Posted By: praveen
Date Posted: 22/May/2009 at 1:35pm
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Over and above whatever is already discussed I do like to look at break-up of ROE to test its robustness. ROE can be broken up into 3 components.
1. Net profit margin
2. Equity turnover
3. Leverage
Net profit margin
I look at net margins first then look at local industry wide net margins, then try to find out global net margins in that industry. (Idea is to test the sustainability of that net margins.)
I also look at historical variations in net margins. If I see a huge difference in last few years compared to a much longer history, I try to find the reasons for same.
I tend to prefer companies with net margins equal or slightly higher than peers. Slightly higher shows some pricing power. I am though wary if the margins are too high compared to peers. In most cases it is not sustainable.
Equity Turnover
I love companies with high/increasing equity turnover. Generally equity turnover is fairly robust and doesn't decrease that often unless there is some external impact on the capital structure. Increasing equity turnover without increase in debts shows that capital requirement for incremantal revenue generation is quite low which is always welcome. High equity turnovers with reasonable net margins can create sustainable high ROEs.
Leverage
I like companies with some debt on their books because debt disciplines a company. However these companies should have ample scope for additional debt or leverage because that provides the flexibility to fund growth and also it can increase the ROEs.
Debt levels i look for is roughly
Debt to equity ratio less than 0.5x or
Debt to EBITDA less than 1.5x
Obviously above mentioned figures can vary depending upon industry and other factors. ------------- The quest for knowledge is a never ending Journey |
Posted By: NileshGambhava
Date Posted: 22/May/2009 at 4:58pm
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If you look at great multi-baggers then most of them were not satisfying these criteria in their early stage but later on they fitted well in the criteria. And if you buy in early stage then only it becomes multi-bagger (Multiple Money) else it is only Good Return (3 or 4 times F.D.). So the question is to catch company in early stage or wait and buy when it satisfies criteria? Like Infosys was trading at 70 PE in 1998, Bharti’s Mkt Cap was 120 K even though it was making loss or Viceroy Hotel now… ------------- :) |
Posted By: praveen
Date Posted: 22/May/2009 at 5:43pm
Well for every example where a company became mutlibaggers / there would be 10s of companies which became mutli-losers from the kind of figures you mentioned.
So for all those like me who doesn't have the eyes for spotting the next Infosys/Wipro/Airtel, it is prudent to focus on creating good returns multiple times rather than dreaming about the "multi-multi bagger" ------------- The quest for knowledge is a never ending Journey |
Posted By: subu76
Date Posted: 22/May/2009 at 8:14pm
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A 40 bagger is everyone's dream.
Discovering companies before they acquire limelight is obviously a very difficult proposition. No wonder india has only one RJ.
Some first hand experience will probabily be very helpful to invest a significant sum.
For e.g. Basant Ji fell in love with Pantaloon when he visited it's park street outlet.
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Posted By: manish_okhade
Date Posted: 22/May/2009 at 10:24pm
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Finding a multibagger like 30,40 or 50 is each investors dream. But if you use rational mind then it looks more like a gamble, i mean one can get it once or probably twice but definitly not consistantly. Market is full of smart people, forget the retail investors we have lots of Fund Mgr who are assumed to be brilliant by any acedemic standard. Its their full time job to see the market still i have never seen any MF scheme has given 30-40 kinda baggers.
Well i wish that all forum members should get multi-bagger but at the same time i feel that rationalization of investment expectation is important. Greatest ever investor WB has amassed the wealth via snowball effect not by any short term magic.
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Posted By: NileshGambhava
Date Posted: 22/May/2009 at 12:01pm
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It is very hard to find out one multi-bagger but what I feel is that one needs only 2 or 3 multi-bagger in his/her life. I am ready to sit on cash or to park my money in F.D. for 5 years to find out only one multi-bagger like Hero Honda or Infosys or Airtel. If I found one multi-bagger during my life period which is 40 or 50 times and If I invest my one year Income then automatically it becomes my life long income. Can any one please start thread on “Pick Only One Multi-bagger for life time”? ------------- :) |
Posted By: NileshGambhava
Date Posted: 28/May/2009 at 3:48pm
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Does any one know future Multi-bagger?
It must be minimum 10 times in next 4 years. ------------- :) |
Posted By: chimak10
Date Posted: 28/May/2009 at 4:26pm
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Mumbai: If you had invested Rs 1,000 in Supertex Industries when everyone was throwing stocks away like lighted firecrackers last Diwali, you would be a lakhpati today.
http://www.dnaindia.com/report.asp?newsid=1259607 - http://www.dnaindia.com/report.asp?newsid=1259607 The little-known Silvassa-based company that manufactures parts for textile machinery has seen its share price multiply 100 times in the past seven months -- from 45 paise on October 27, 2008, to Rs 43.90 on May 27, 2009. 
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Posted By: basant
Date Posted: 28/May/2009 at 4:55pm
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Interesting but how are the financials? ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: chimak10
Date Posted: 28/May/2009 at 4:57pm
| pathetic to say the least........for years falling sales and profit...........operator stock............wonder why the reporter didn't mention that |
Posted By: NileshGambhava
Date Posted: 28/May/2009 at 5:13pm
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Please no operator stock or bubbles.
Purely based on fundamental and future multibagger only ------------- :) |
Posted By: subu76
Date Posted: 29/May/2009 at 10:18pm
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Nilesh, I can tell you from personal experience that only brokers will sell you sure shot 10 baggers and that too during a period of exuberance.
There are multiple ways to reach Delhi.... One way to find multibaggers has been to buy companies with some competitive strength when their prospects look ugly in the near term and the market is giving them away.
Also, most people who have been in the market for less than 5 years think they can get a 20%+ return while most people who have been in the market more than 20 years think they can get a 12% return. (A survey quoted by WB)
The reality is most lay investors like us struggle to beat the market.
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Posted By: chic_1978
Date Posted: 29/May/2009 at 11:59am
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Does any one know future Multi-bagger?
It must be minimum 10 times in next 4 years.
====================================
Chec this script - SAAMYA BIO
http://bseindia.com/price_finder/stockreach.asp?scripcd=532905 - http://bseindia.com/price_finder/stockreach.asp?scripcd=532905
http://www.saamyabiotech.com/Saamya-India/images/saamya%20annual-08.pdf - http://www.saamyabiotech.com/Saamya-India/images/saamya%20annual-08.pdf
Is ne one folllowing this script...some sources says its a potential multibagger...lets try & find more abt it.
------------- happy & wise investing |
Posted By: wiseowl
Date Posted: 30/May/2009 at 9:46pm
No one knows about future multibaggers, they know only past multibaggers. ------------- You alone are responsible for your actions. |
Posted By: subu76
Date Posted: 30/May/2009 at 1:42am
That's an excellent thought.
 And most of us (Certainly me and my friends) love to do mental calculations around these past multibaggers.
The past is always crystal clear but the future is clouded.
We should read/write/hear such lines every day.
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Posted By: manish_okhade
Date Posted: 31/May/2009 at 1:05pm
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Hi Subu,
Would like to coorect little bit.
Past data is important for assessement of companies competitive strenght as well as management capability. I dont think in India we have any company which is having something very unique to offer, theres always a competitor. So what distinguishes them is the management. INFY grown due to NM and Wipro due to Mr Premji. In IT revolution many companies have tried to emulate but very few survive decently.
Regarding future, investor has to look at the future. We have to live year ahead to win a good deal. So what matters is the identification of good company and most important is buying them when they become cheap! Heres the catch, cheapness comes at the cost of challenging the crowd. For example when everything was collapsing then you can very easily see that many companies are written off by the investors and now compare yourself the prise difference. Many of them are still 2-3 baggers in short span!
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Posted By: wiseowl
Date Posted: 31/May/2009 at 1:58pm
Exactly. In Buffett's words, we should aim for buying "easily identifiable princes at toad-like prices". What happens often is that investors latch on to stocks of badly-run companies with dubious managements in the fond hope of hitting a multibagger. Most often these stocks are driven by operators and rumours, and investors end up burning a hole a their pocket. ------------- You alone are responsible for your actions. |
Posted By: subu76
Date Posted: 04/Jun/2009 at 12:27pm
I thought a bit more....thanks for correcting me.
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Posted By: talk2me
Date Posted: 10/Aug/2009 at 6:46pm
| I came accross a artical on http://www.investopedia.com/articles/00/092200.asp - Move Over P/E, Make Way for the PEG |
Posted By: manish_okhade
Date Posted: 10/Aug/2009 at 6:54pm
In my humble opinion all mathematical valuation techniques are based on historical correlation. In business past does not necessarily repeat in future. For evaluation metrics like PEG, DCF etc are good to give comfort in making final buying decisons but real rational should be dependant on many facets like understanding of business model, scalability opportunity etc.
In fact valuation techniques vary greatly from sector to sector. I recommend you to read a book Beating Strat from Peter Lynch. Its a great book in which Peter has opened his heart on various types of companies and explained how he come acrss a valuation of them.
A must read for all!
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Posted By: talk2me
Date Posted: 10/Aug/2009 at 7:15pm
Thanks for your recomendation , I had read this book long back. 
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Posted By: manish_okhade
Date Posted: 17/Aug/2009 at 5:24pm
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Hello Basantji, Vivekji, FutureBull, Kullmanji, SmartCatji and others,
I am giving below once example for right prise evluation. Let me know if you see any flaw here:
Stock Name: Colgate Palmolive
Today's prise: 600
PE: 28.6
MktCap/Sales(FY08-09) : 8187/1770 = 4.6
Historical data:
I am assuming a safe growth rate of 20% and PE of 20 as worst case scenario for next 3 years. It gives me following:
So EPS of 36.87 gives me following:
So if i get the Col-Pal by say 550 then i will be earning CAGR of 10.27% for 3 years.
Is something wrong above, am i seeing a margine of safety above? Typically FMCG scrips gets PE of 25-30 in best time so upside is also look higher.
Looking forward to your comments.
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Posted By: chimak10
Date Posted: 17/Aug/2009 at 6:23pm
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Add dividends or vivek will go ballastic
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Posted By: smartcat
Date Posted: 17/Aug/2009 at 6:24pm
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That is an extension of PEG investing - this is what everybody who has just read a Peter Lynch book starts off with, as their stock investing strategy. However, it works well for evaluation of FMCG stocks only. Try this technique with any other sector, and you will get mixed results. |
Posted By: manish_okhade
Date Posted: 17/Aug/2009 at 6:27pm
Yeah i know that i am just extrapolating past to future bit linearly.
But i still did not get my answer whether for a stable player like Co-Palm, is anything looks wrong in evaluation
 ? |
Posted By: manish_okhade
Date Posted: 17/Aug/2009 at 6:28pm
Aapaka witty one liner answer me jwab nahi
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Posted By: chimak10
Date Posted: 17/Aug/2009 at 6:34pm
| EDIT : do add the dividend.......they paid 16 Rs last year at current price of 600 yield work out @3% so add it to your 11% you got 14% CAGR........though not a great return. |
Posted By: manish_okhade
Date Posted: 17/Aug/2009 at 6:38pm
Yes, you are right.
I am planning to put 50% of my portfolio in some stable players with 14-15% return expectations only. Afraid to put whole money in OnMobile,Opto,Titan, can't dare this much!
So it looks you thinks i am on right track.
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Posted By: chimak10
Date Posted: 17/Aug/2009 at 6:45pm
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Can't really advice on stocks really with me being too amature...
They day i give advice on stocks is the day pigs fly. |
Posted By: FutureBull
Date Posted: 17/Aug/2009 at 6:51pm
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my 2 cents on this...first examine why Co-Pm is given such a high PE and why Can't it sustain it in next 3 yrs.i am fine with your growth assumption..
In my view there are following reasons for high PE. when you take DCF method of valuation you also find out terminal value of the cash flows. If terminal values tends to be higher PE is given higher automatically which seems to be the case with Co-Pm because of their positioning, brands, growth rate of India etc etc. Another aspect which we are missing is Risk Vs Return equation. Risk of slippage from it is lower and certainty of earning is higher and hence high PE but how high? if broader market doesn't give confidence you will hide behind certainty ..i think 20-25 PE is reasonable for Co-Pm and you can assume for next 3 yrs as well.. and at the end of day you have to discount it with your own rate of expectation to justify a buy or sell. ------------- ‘The market always does what it’s supposed to — BUT NEVER WHEN’. |
Posted By: manish_okhade
Date Posted: 17/Aug/2009 at 7:08pm
I have not considered Div as well as cost of opportunity because i am trying to come up with worst case or you can say safe case scenario of growth rate of 20% and PE of 20.
While market accords typically higher PE in the range of 25-30 which will give me much higher return. 10-15% is what i am trying to ensure as minimum return.
Reason for high PE in my opinion is due to as you rightly said stable cash flow (Everybody needs toothpaste and every year day generation comes as consumer). So this makes business less volatile, plus Co-Pm has good prising power as when one buys the toothpaste then one never looks whther cost of a tube is up by 1/-.
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Posted By: subu76
Date Posted: 17/Aug/2009 at 7:32pm
Only......Manish Bhai...15% mein you will beat many of the giants of investing.....you are really planning nicely.
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Posted By: smartcat
Date Posted: 17/Aug/2009 at 8:15pm
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The best stock evaluation technique is one that does not involve too many numbers and parameters like EPS, P/E, CAGR - but one that involves "business analysis" of a company. Taking colgate as an example -
- What is the last 5 year marketshare of Colgate's products? Is it increasing or decreasing or staying steady? Data will be available from either Colgate's annual report, Google search or its competitors annual report
- Are there any new entrants coming up in the horizon? ITC, for example? Is Dabur gaining marketshare in toothpaste segment?
- How aggressive is the company when it comes to introducing new products from the parent co?
- Are too many competitors entering the fray? It might put pressure on the company to reduce prices, like the shampoo wars between HUL and others.
and so on....
Because, once you get answers for these, you will be able to better your earnings estimate for the next 3 years.
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Posted By: kulman
Date Posted: 17/Aug/2009 at 8:25pm
Very well said. Besides, a general comment not specific to Col-Palmolive: If one pays for all good that's going to happen, means if all the 'expectations' are discounted in the price, then the returns on that investment would be near/below average in most cases. ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: Vivek Sukhani
Date Posted: 17/Aug/2009 at 10:13pm
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Hi Manish Sir,
A few observations on your methodology:
1. This is quite a liberal way of looking at things. Its not so easy to go on doing 20 p.c. growth for years together.
2. There is simply no reason why a stock growing at 20 p.c should trade at a minimum P/E of 20.
3. Because of the above 2 reasons, I dont see any margin of safety in Colgate.
4. As a thumb rule, consumer good companies should be bought when you think that the markets have topped out.
5. There's nothing like buying and resting easy for years together. In stock markets, prices can be either expressed as an absolute measure or as a relative measure. You should contimue to hold Colgate as long as you dont get the similar sense of comfort in buying other companies' stocks. ------------- Jai Guru!!! |
Posted By: manish_okhade
Date Posted: 17/Aug/2009 at 11:44pm
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Vivek Bhai,
I have analyzed the business model and relative strenghth and so on as suggested by other friends in this post.
Now assume that i find Co-Pm as good investment then how do i determine the right prise to enter, thats what is my dilemms?
Let me know for a stable player with somehow steady growth whether other than DCF or what i described above makes sense or not?
Anyway thanks for reply.
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Posted By: Hitesh Shah
Date Posted: 17/Aug/2009 at 7:41am
This basic question still remains after such a lot of very stimulating discussion! Anyway, the stock goes ex-dividend (first interim @ Rs. 8 per share on 20th August). ------------- |
Posted By: smartcat
Date Posted: 17/Aug/2009 at 11:21am
 Actually Manish, after you do the 'business analyis', fair entry price could be determined by your EPS growth/forward PE/current PE calculations.
But if your analysis of the stock gives you a good impression (very little negatives, lots of positives), then you should assume a higher EPS growth rate and a higher P/E.
and vice versa.
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Posted By: Hitesh Shah
Date Posted: 17/Aug/2009 at 11:31am
And suppose it doesn't fall to say 550, then what? This is another common dilemma. Perhaps the mathematically gifted can work out the consequence of buying COLPAL at CMP versus not buying it at all. ------------- |
Posted By: manish_okhade
Date Posted: 17/Aug/2009 at 11:36am
Hitesh,
I am not trying to figure out exact value say 550. If we can find a way to determine the range or cut-ff still we it would be an acheivement.
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Posted By: Hitesh Shah
Date Posted: 17/Aug/2009 at 11:50am
Fair enough. I'm just cautioning against missing the bus of buying any stock you really like based on a lot of projections. ------------- |
Posted By: manish_okhade
Date Posted: 18/Aug/2009 at 6:49pm
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Just one more line of reasoning, its based on following assumptions:
1) After 2-3 yrs SENSEX will reach sometime 15K+
2) Co-Pm will maintain the growth rate of 15-20%
If my analysis of business convinces me at least for #2 then based on #1 presently PE is 25+ so after 2-3 yrs with #2, EPS would be much better than as of today and if SENSEX stays near 15K+ then PE will be lower due to higher EPS. Investors will tend to accord close to same PE after 2-3 years.
Isn'it a profit! Ofcourse all depends on correctness of above assumptions.
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Posted By: subu76
Date Posted: 18/Aug/2009 at 7:06pm
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Not sure if this is a story or fact..
Apparently Colgate can increase it's sales just by increasing it's nozzle diameter.
Offcourse, you can't increase this forever. |
Posted By: manish_okhade
Date Posted: 19/Aug/2009 at 1:44pm
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Found some interesting info:
From a modest start in 1937, when hand-carts were used to distribute Colgate Dental Cream, Colgate-Palmolive (India) today has one of the widest distribution networks in India – a logistical marvel that makes Colgate available in almost 4.3 million retail outlets across the country, of which the Company services 1 million outlets directly. The Company has grown to a Rs. 1700 crore plus organization with an outstanding record of enhancing value for its strong shareholder base. The company dominates the Rs. 3100 crore Indian toothpaste market by commanding more than 50% of the market share.
Good pricing power -
1) Reduce the weight of tube in gms but retails the price of the tube.
2) Increase the mothe of the tube so that it lasts fast
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Posted By: Hitesh Shah
Date Posted: 19/Aug/2009 at 1:49pm
So what have you decided?
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Posted By: manish_okhade
Date Posted: 19/Aug/2009 at 1:50pm
I got all the gyan from TEDs but none whether entry price is right or wrong
 . That was my motto of this post, now still dabbling with evaluation amd making up my mind to buy on dips. |
Posted By: Hitesh Shah
Date Posted: 19/Aug/2009 at 4:46pm
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Purely on a lighter note .... Next time look for a company whose earnings aren't governed by the nozzle dia
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Posted By: manish_okhade
Date Posted: 19/Aug/2009 at 6:18pm
he he.. aap majaak achcha kar lete hain
 .Thoda Co-Pm evaluation pe gyan bhi dijiye na. I have identified few stable player for major investment amt so it will help.
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Posted By: Vivek Sukhani
Date Posted: 19/Aug/2009 at 7:27pm
You may not lose, but you wont get your target CAGR over a longer period.
I get angry when friends throw such scenarios before me....i ask them, were you sleeping when Colgate was lotering in the 360-370 range??? As a friend I dont want my friends to get saddled with a non-performing stock. If not appreciation, they should get a decent return by way of dividends. ------------- Jai Guru!!! |
Posted By: manish_okhade
Date Posted: 19/Aug/2009 at 7:40pm
Vivek,
I am tad new so seen the crash first time in my life, also regret for missing the opportunity. I simply could'nt muster enough courage to buy when it hits so low. Now my goal is determine safe entry range and possibly build a position patiently on dips and use the volatility to my benefit.
Any way i would like to thank you for being first to be so certian on replying on evaluation.
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Posted By: Vivek Sukhani
Date Posted: 19/Aug/2009 at 7:46pm
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On crash Colgate may easily get into 450 range, so dont build a huge position there.
Assuming 16 rupees as dividend, which is what I am expecting this year, at 450, it gets you that comfortable 3.5+ p.c. yield.
Of course, I am using a bit of Technical Analysis here, so I am prone to get this wrong. But then, 450 is possible, though not probable at this moment.
------------- Jai Guru!!! |
Posted By: Hitesh Shah
Date Posted: 19/Aug/2009 at 8:54pm
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Manish, you wrote: he he.. aap majaak achcha kar lete hain. Thoda Co-Pm evaluation pe gyan bhi dijiye na. Majaak is my strong point but evaluation is my big zero so I'm really sorry I can't contribute there....  Vivek, you have got me more confused than I already am ... In your post dated 17th August, you wrote: 4. As a thumb rule, consumer good companies should be bought when you think that the markets have topped out. And today, you wrote: On crash Colgate may easily get into 450 range, so dont build a huge position there. Isn't this contradictory?  ------------- |
Posted By: Vivek Sukhani
Date Posted: 19/Aug/2009 at 9:05pm
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A bit true....
Its like this, Hitesh bhai. These companies tend to outperform during bad times, and underperform during good times. Therefore, as a rule they should be bought on the advent of bad times.
But among consumer good companies, Colgate has outperformed a bit too much in the bad times. Therefore, it should return to something more sane for it to offer value. ------------- Jai Guru!!! |
Posted By: rakeshmehta48
Date Posted: 19/Aug/2009 at 12:09pm
Colgate always looked expensive in the past and will remain so in the foreseeable future, but look at the returns this stock has given. Perhaps difficult to calculate on a calculator.
It looked very expensive some 20 - 30 years ago also. I remember having bought this stock in early eighties at around 250 or so (it was expensive at that time) and regret having sold it 4-5 years later.
One of my friend was blessed with a daughter in early 80's and I remember having advised him to buy 200 colgate for his daughter's marriage. He did and even today when we meet, he always thanks me.
The point I want to bring home here is that stocks like Colgate are ever green and one can go blindly for such stocks, if one is a long term investor.
Pricing/Timing is individual,s choice. ------------- Fund Management is Most Important |
Posted By: somu0915
Date Posted: 19/Aug/2009 at 12:21pm
| How much has colgate appreciated in 30yrs? |
Posted By: rakeshmehta48
Date Posted: 19/Aug/2009 at 1:11am
I don't know exactly, but easily over 100 times capital appreciation plus annual dividends which itself must be over 2-3 times the initial investment.
------------- Fund Management is Most Important |
Posted By: manish_okhade
Date Posted: 19/Aug/2009 at 10:34am
Are you suggesting to wait for another crash to enter in Co-Pm?
Actually when crash happens then entire stock mkt is available at discount and we never knew when crash could happen!
So shall we wait for unpredictable time or device some safe entry point for sound scrips and enter slowly not in one go on dips?
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Posted By: Hitesh Shah
Date Posted: 19/Aug/2009 at 10:50am
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If you enter little by little, I feel the "entry" point will require less or none of all these complicated (for me) calculations. The whole point of a company like Colgate is that it should not need all these calculations. This buying on dips is an attractive argument but, in reality, you have to start calculating all over again: what is enough of a dip? As I said, you will now not get the first interim dividend. ------------- |
Posted By: Vivek Sukhani
Date Posted: 19/Aug/2009 at 11:35am
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sach hai, Hitesh bhai.
By the way, aap Adani Power se nikal gaye kya???? Kitna aaya tha?
------------- Jai Guru!!! |
Posted By: manish_okhade
Date Posted: 19/Aug/2009 at 11:37am
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Hitesh,
U r right but thats the purpose of this post.
Everybody seems to agree that Co-pm is a potential investmnet but none knows exactly how to value it. True, there may not be a exact answer but i guess if we all try from our experience then it will benefit all.
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Posted By: Hitesh Shah
Date Posted: 20/Aug/2009 at 12:37pm
So my contribution is limited to the comments that certain stocks don't require zyadaa brain bazii. Others may. ------------- |
Posted By: manish_okhade
Date Posted: 20/Aug/2009 at 12:41pm
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Hitesh Bhai,
Which stock does not require jyada brain bazii? Plz let me know
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Posted By: Hitesh Shah
Date Posted: 20/Aug/2009 at 1:21pm
Many stocks if acquired gradually come in this category. Colgate is an excellent example. Of course, if one has the guts to buy when the markets crash, then the problem doesn't arise. Instead, we take out Almanacs, Vernier callipers, slide rules, electron microscopes, etc., to conduct accurate measurements of intrinsic value, projected EPS, etc., and let the moment go. ------------- |
Posted By: kulman
Date Posted: 20/Aug/2009 at 9:30am
Posted By: manish_okhade
Date Posted: 20/Aug/2009 at 10:38am
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Kulman, Let me know the page no., will go through it again.
Just wondering, if we do not estimate and pay for future then we end up buying for assets alone. None of the sound and growth based company will ever be able to go down close to asset level price even in adverse scenarios.
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Posted By: Hitesh Shah
Date Posted: 20/Aug/2009 at 11:34am
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Quoting Kulmanji who was quoting BG, The concept of an indefinitely favorable future is dangerous ... This is an example of extrapolating an opposing argument to an extreme in an attempt to win a debate or to confound someone .------------- |
Posted By: Vivek Sukhani
Date Posted: 20/Aug/2009 at 11:44am
Manish Sir, you may surely use whatever method you may like to use, but dont ever try to predict the levels where the stocks may go down to in "adverse" scenarios.
Its very easy to get carried away in the sway of bull markets, but when the tide turns out, the scene can be very unforgiving and cruel.
All in all, while models should be destroyed, rebuilt and redestroyed, its very important to keep the ears on the ground with feet 3 feet in the sand. ------------- Jai Guru!!! |
Posted By: kulman
Date Posted: 20/Aug/2009 at 11:46am
Any kind of extremism is dangerous. Sant Kabir says... ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: kulman
Date Posted: 21/Aug/2009 at 12:02pm
On public demand, here's an approximate translation/interpretation of this doha: Excessive talk is not good, neither is excessive silence. Rains in excess isn't good so is excessive heat. Things may be good to a certain limit, beyond limit (extremism of anything) it creates problems. ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: manish_okhade
Date Posted: 21/Aug/2009 at 12:19pm
Vivek sir,
You are getting me wrong. I have started this debate by considering Co-Pm as an example. I would like to know how to value this business and i gave just one example for that.
Ok you find that example incorrect, i really do not mind. What's the intention here is to determine the value of such businesses. In your opinion one should enter Co-Pm when it drops down heavily, fine but its just one reasonable way for entry but doesnt one has to wait for such dips to happen and who knows when such dip will occur?
Just quoting Peter Lynch (from my poor memory) "A lot of money is lost in anticipating the crash then in crash itself" That's the dilemma....
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Posted By: kulman
Date Posted: 21/Aug/2009 at 12:24pm
It is from Chapter # 13, page 161 of http://books.google.co.in/books?id=SWI1IkcuSDIC&dq=timothy+vick+how+to+pick+warren&printsec=frontcover&source=bl&ots=RnIvLByGkA&sig=6YbU4wk8BwjkndMOfOrUFm-gDqw&hl=en&ei=nzyOSs74GpWI6wO6kPnKCg&sa=X&oi=book_result&ct=result&resnum=1#v=onepage&q=&f=false - this book . ------------- Life can only be understood backwards—but it must be lived forwards |
Posted By: photophobic111
Date Posted: 08/Sep/2009 at 11:52am
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Well so what is collective wisdom of TED? I guess basically it ends up on personal decision. But as for new entrants to market, that is one of the BIG question - when to enter after evaluating companies - both fundamentally and by financial ratios. (though there are still open questions due to limited knowledge for me atleast..but when you are basically satisfied..).. As is being said, you miss the the bus and then wait for crash toenter the stock? The question is - Am I paying too much for expected future growth ? Or should I wait for price to come down... |
Posted By: master
Date Posted: 01/Oct/2009 at 11:28am
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May interest those who feel fundamental valuation is still alive - a sectoral view..
http://moneytoday.intoday.in/index.php?option=com_content&task=view&id=5875&issueid=76§ionid=106&Itemid=1 - ------------- Someone’s sitting in shade today because someone planted a tree long time ago. |
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Posted By: Hitesh Shah
Date Posted: 02/Oct/2009 at 1:31pm
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Nice post, Masterji. Thanks!
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Posted By: Hitesh Shah
Date Posted: 02/Oct/2009 at 1:37pm
Ouch!
Equitymaster's 5 minute wrap. ------------- |
Posted By: manish_okhade
Date Posted: 02/Oct/2009 at 5:30pm
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May interest those who feel fundamental valuation is still alive - a sectoral view..
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A nice post.
Just one nickle addition - Valuation is usually becomes cheaper or fair when some crisis occurs, at that time if one has the courage and ability to determine safe prise is the winner.
I still remember tempting to buy ICICI but could not muster courage to buy..... |
Posted By: manish_okhade
Date Posted: 05/Dec/2009 at 11:06am
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I have recently completed two books (Value Investing from PP and Fooled by randomness from N Taleb) and BFV PDFs of Prof Bakshi. Needless to say all 3 are masterpieces and gives a very different perspective to investing. They helped me to reject many of my firm beliefs of historical anlysis.
I found some commonality in all 3 authors and would like to share it below:
1) When index rises and all signs of bull mkt to start then its more advisible to be careful in fresh bets than when one is in bear phase (its contrary to coommon beleif). Everything is speculation in such phase it means one blackswan event can wipe out everything in one blow. Ever growing rise in stocks makes you feel better if you have been already invested but from fresh investor its not probably a good sign. Suppose one is earning @30% per annum for initial few years then all of sudden one event makes drop of 60-70% will leave to starting point or even lower!
2) Best bet can be found in troubled companies where people are valuaing less than possible value of enterprises (Well but its an art!). Such investing will make you loose small amount frequently but gives you extraordinarily gain infrequently!!! WB has started like a common investor unless his bets returns extra extra ordinary gains he can never turn billiannaire, note that WB is against leverage. WB has invested mostly in penny stocks which turned out to be huge gain later on. Its GEICO where he put all his savings and it was a penny stock which skyrocketed to 100+ later on. Money and fame earned out of this is later invested more wisely which made WB the richest man.
3) Never rely on huge historical data instead analyse the present data carefully and calculate the expectation with following formula:
Expectation = Probability x outcome
But again its more of an art where one should assign safe values to right side part of the equation. Bet on event where expectations look very high.
4) Investing is more of bets where one should be careful with odds. One has no pre-priori knowledge of any scams or mgmt goof up.
5) Be careful in filtering noise and information. Recently waht i saw that stocks of TAT ELXI and Mindtree broken the circuit based on the simple news that TATA ELXSI has opened a small center in Hollywood or Mindtree has decided to open a new vertical for product engg. These are not significant events in proportion to rise in stock prises. Looka t others like Wipro, Infy too is in product engg long back but its not transalating in huge business gain!
Happy investing!
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Posted By: Hitesh Shah
Date Posted: 05/Dec/2009 at 11:21am
The news also had a certain "RaReing" Bull showing interest in the scrip. This may also have pushed up the price without any really fundamental reason. It is a pity that so-called leading papers keep providing this type of "information", and that people concerned can benefit from such planted news. Trying the give the link (again) http://lite.epaper.timesofindia.com/mobile.aspx?article=yes&pageid=14&edlabel=ETM&mydateHid=04-12-2009&pubname=&edname=&articleid=Ar01407&format=&publabel=ET - here ... This works! ------------- |
Posted By: prabhakarkudva
Date Posted: 05/Dec/2009 at 11:36am
As far as i know he has made the money he has made because of leverage.He used the insurance float money to invest and make outsized returns. The difference being he knew how to operate with leverage whilst most of us don't know yet. ------------- Take your chances and keep them in a box until a quieter time. |
Posted By: manish_okhade
Date Posted: 30/Jan/2010 at 10:50am
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Investment opportunities can be classified in following categories:
1) Evergreen, steady slow grower : Colgate, ITC, Godfrey, Castrol etc Ususally available at moderate to high PE and has low or zero debt.
2) New sector, new idea, concept etc : Bilcare, Praj, Suzlon etc. Pet choice for Rakesh Jhunjhunwala.
3) Growth: Darling of majority of investors, this has the charecteristics that business is judged as scalable so huge PE expansion is anticipated. Pentaloon, Titan and all types of stocks ususally like by Basant Saab.
4) Troubled - Mostly those stocks which were once of type #3 but strategy gone wrong and results in huge debt at the price of growth e.g. Suzlon. Second category is those companies which tried to come up with some new offering which is not successful.
5) Cyclical - As the name suggest time is everything for them GE Shipping etc.
6) Commodity : Governed by law of demand and supply. Metals even banking also now a days falls in this category. Going forward few people say IT sector is also gaining the status of commodity.
Stock Valuation:
1) Evergreen, steady slow grower : Among all above least risky bet if #1 if you study the history very well. Just look at past CAGR and median PE. If at any point of time future price looks lesser than the historical trend then one buy with huge safety. Regular divident is another icing on the cake.
2) New sector, new idea, concept etc : More suited for PE type investor. Domain knowledge is of paramount importance. Risk/reward is very high.
3) Growth: One needs a knowledge of larger picture and typically needs long term patient investing. One needs constant information on scalability choices, mgmt ability to manage the scarce resources and ever prevailing capitol risks etc. These stocks can not be measured by PE in my opinion because one can never be sure of expansion benefits. RoCE and RoE is the best metrics. Debt mgmt monitoring is very critical because nobody knows when time swings and growth stagnates. One should take the caution from WB in his AR 1996:
"Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid."
4) Troubled: I guess this needs deep knowledge of business moats and balance sheet analysis. If analysed with caution then based on risk/reward basis an excellent deal could be found. Such stocks to be valued based on bankruptsy value. Normally investors write off such stocks so avalaible cheaper than their EV. W Buffett has inevested in initial days in such sectors and earned whopping gains.
5) Cyclical: Timing is everything!
6) Commodity
Read Jim Rogers and understand demand/supply graphs. Best example is available in AR 97 and in this WB says:
"Last year, we purchased 111.2 million ounces. Marked to market, that position produced a pre-tax gain of $97.4 million for us in 1997. In a way, this is a return to the past for me: Thirty years ago, I bought silver because I anticipated its demonetization by the U.S. Government. Ever since, I have followed the metal's fundamentals but not owned it. In recent years, bullion inventories have fallen materially, and last summer Charlie and I concluded that a higher price would be needed to establish equilibrium between supply and demand. Inflation expectations, it should be noted, play no part in our calculation of silver's value."
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Posted By: manish_okhade
Date Posted: 02/Feb/2010 at 3:40pm
PFB the average PE for past:
Stock is fine but if you enter at higher band at any year then one may end up loosing the capital. Those who purchased at 150/- in Y2K, it took many years to recover.
Presently stock is quoting at FY10 PE of 24x so bit expensive so if it drops to 600-625 band then i am going to grab it !!!! It will translate to PE of 20x which is safe entry point.
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Posted By: praveen
Date Posted: 02/Feb/2010 at 4:41pm
IMHO using insurance float money to invest in not exactly leveraging.
------------- The quest for knowledge is a never ending Journey |
Posted By: Monkey
Date Posted: 02/Feb/2010 at 6:08pm
What is meaning of "IMHO"?
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Posted By: rapidriser
Date Posted: 02/Feb/2010 at 6:30pm
In my (usually not very) humble opinion
------------- When all else is lost, the future still remains. - Christian Nestell Bovée |
Posted By: joslinjose9
Date Posted: 02/Feb/2010 at 6:34pm
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hi,
where u got this data. ------------- fear of lord is the beginning of wisdom |