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Wednesday, February 16, 2011

How you can spot the multibaggers

I am a 22yrs old at present and my experience in investing for the past 7-8 years is that,most of the time,the market discounts the performance of companies.The potential largely remains unappreciated.The phenomenon is more visible in mid and small cap companies.My experience of investing in bharti telecom is one of the glaring examples of valuation of the company not reflecting the true potential of the business.The company at that time was very aggressively building up the network in the country.Globally,mobile telephony has been established as a big business,wheras in India,its potential was completely untapped.

The market was so pessimistic that by January 03 the stock fell to as low as rs 20 and its book value was 25rs.Hence the price to book value was 0.8x for a company which was building up India”s largest cellular network.At that level,the company was not even valued at its break-up value,forget about the future potential and prosperity,which was offcourse not visible in the quarterly results.But to a global investor of some repute,this anomaly was crystal clear.It is also not a case of market being in dire straits.The sensex was around 6000 I guess.

It is believed that speculators buys stock to profit from change in stock prices,while investors buys stock for income from the assets.The speculators typically pre-empt the investors.Hence,eventually,it all boils down to someone”s estimate of the future income of the company.In investing it is only after 5-10 years that one will know who was right that period ago.So todays opinion about the future period earnings and tomorrow”s price will reflect tomorrow”s opinion about the next 5-10 years of earnings.

When companies are making losses,be it an existing company or a newcompany,investors shy away from the stock and wrongly extrapolate the current condition well into the future.So much so,that asset prices go significantly below the replacements costs.Problem is that you guys understand price and you hardly bother about the ‘value” in the market.

I would like to cite another example of an existing company called Birla corporation being long neglected by the markets.In 2003-04 when ultratech was acquired by grasim at an enterprise value of $85 per tonne this birla corp with the birla brand was available at an EV of $10 per tonne.The company had incurred losses for 6 consecutive years and the book value was about 30rs per share and the stock was quoting 65% discount to its BV at 19-20 then.The break-up value too was just about 20% for the company.The only problem was no visibility in earnings thanks to the over capacity in the cement industry for a long period.But the potential was rightly valued at about $85 per tonne.In the past few years look where birla corp has moved,thus making it a 15 bagger.

So you see even if a company is not making profits it can well be the next success story.But thing is that you would need to have patience in clinging on to them.They can very well disappoint you bigtime with their underperfomance in a good period but over the long run they would make you a hell lot wealthier.I would soon pen down several loss making companies with immense potential which can repeat the success of these mentioned duo-Hope they would be given a rapt attention and eventually wealth gonna swell.

I can be reached

1 comment:

Unknown said...

Good observation. And, also filter for management quality. Doubtful practices result in companies selling below book value. But rightly so.

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