Month: May 2016

How to spot bargains – Graham Style

Ready to spot a bargain ?

To do that you have to play a game with me.

Imagine you have a choice to invest in one of the four companies below, What price you would be willing to pay for below companies ?

MRF-1

May be profit and sales data can’t be solely used to decide, to help you  let me throw some more numbers at you

MRF-2

All four companies operate on decent margins also they are not commodity business as their margins are improving, While Company B is asset light but overall proxy pre-tax ROIC for all four companies is above ‘AAA’ bond yield. (In India pre-tax yield of an ‘AAA’  bond is about 9%). Also all four companies have negligible debt on their books. This is reflected  in their ROE as their long term ROE is similar to last year proxy ROIC we calculated above.

MRF-3

As a rational investor who is not biased you would pay relatively more for A,B & C which have better ROIC/ROE compared to D.

Right ?

What if I told you that Company B is selling 8 time of company C  (in relative sense)  you would say I must be kidding 🙂

Now let … Read the rest

Kitex Garments – Earnings Power Updated

Another year gone, Got my hands on Kitex Annual report and updated the Earnings Power Box. Lets look at how the company has fared

Before you proceed, its better you go through this post so that you are familiar with terms used below

kitex-2

The Accrual EPS (or reported EPS) saw an increase of 11% while the Defensive EPS declined by 30% and Enterprising EPS declined by 4%

What led to such a sharp decline in Defensive EPS ?

While the company’s purchase of fixed assets reduced by 80% (INR 7.37 Cr Vs INR 31.7 Cr) the working capital increased by INR 47.7 Cr (Last two years they had reduced their working capex). Most of the additional investment is due to the fact that Accounts receivable has increased by 50% and current liabilities have not kept pace with it. Not sure if  company had a significant change in credit policies.

 

Even with a decline in Defensive EPS, the company continues to be in wealth maximisation quadrant

kitex-3

Some other titbits of from Annual report which I found interesting

  • Last year annual report claimed that there capacity was 5.5 lakhs pieces of infant wear per day, this year it’s called out as
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Why it is difficult being contrarian ?

In December 2014, I wrote a book review of  investment classic from Howard Marks – The most important thing, Here is a reprint of passage from that post

[My re-emphasis in red]

What makes people and markets in general to commit mistakes ?

  • Greed – An extremely power full force that overcomes common sense
  • Fear – Prevents investors from taking constructive action when they should
  • Herd behaviour – Thinking and behaving like crowd
  • Dismissal of historical pattern – reason for so many bubbles and burst

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All of the above come naturally to any investor and this is the reason they are very difficult to let go  only few individuals develop habits to negate above

Now how does one combat above –

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