“The investor of today
does not profit from yesterday’s growth.” Warren Buffett
Most
of us have relatives who like to fashion themselves as ‘stock-gurus’, with
their stories revolving around how they ‘could have been’ millionaires now, if
only they had held their nerves. The stock that comes up frequently in these
conversations is Infosys. If you had invested Rs. 9,500 to buy 100 shares of
Infosys in the IPO (that went undersubscribed in 1993), 51,200 shares (adjusted
for bonus issues) worth sum of Rs. 4,89,70,240 would be in your kitty.
Infy has given CAGR returns of whopping 42.6% to investors during last 24 years (that too after keeping dividend payouts aside). Infosys got listed in June 1993 at price of Rs. 145 per share and investment of Rs. 9,500 in June 1993 is valued at 4.9 crores today. But, is Infosys still the key to riches? As often repeated, past performance is no guarantee of future results. So, how does one find out the next ‘Infy’?
Infy has given CAGR returns of whopping 42.6% to investors during last 24 years (that too after keeping dividend payouts aside). Infosys got listed in June 1993 at price of Rs. 145 per share and investment of Rs. 9,500 in June 1993 is valued at 4.9 crores today. But, is Infosys still the key to riches? As often repeated, past performance is no guarantee of future results. So, how does one find out the next ‘Infy’?
A
Fast Grower is a small yet aggressive & nimble firm, which grows roughly at
20-25% a year. This is an investment category which can give investors a return
of 10 to as much as 200 times the investment made by them. No doubt, it remains
a favourite of Peter Lynch!
In
1950s, the Utility & Power Sector were the fast growers with twice the
growth rates to that of the US GDP. As people got more power-hungry gadgets for
themselves, the power bills ran through the roof & the power sector surged
with booming demand. Post the Oil Shock in 70’s, cost of power generation
became high with power tariffs going up; people learnt to conserve electricity.
Demand, thus, fell and power sector witnessed a slowdown. Prior to it, similar
decline was observed in the Steel Sector & Railroads. First, it was the
Automobile Sector, and then the Steel, followed by Chemicals & Power
Utility & now the IT Sector is showing signs of slowing down. Every time,
people thought, rally in the fast growers of the age would never end, but it
did end, with people losing money as well as their jobs. Those who thought
differently like Walter Chrysler (founder of Chrysler Corporation), who took a
pay cut and left the railroads to build new cars in the turn of the last
century, became the next millionaires.
Three
phases involved in their life cycles, are:
1.
The Start-Up Phase: Majority of the companies either
burn up all the cash or run out of ideas by the end of this phase. Maximum
casualties have been observed here, making it one of the riskiest phases.
However, maximum returns can be made from them, if one enters near the end of
this phase.
2.
Rapid Expansion Phase: The Company’s
core proposition has worked now, with the strategy being replicated by
expansion of product/service portfolio or consumer touch points.
3.
Mature Phase: Growth slows down, either due to
high debt or low cash, owing to the massive expansion witnessed in early stage.
Fall in demand or legal restrictions might also contribute to faltering growth.
The
trick is to track, which phase the organization is in, at the moment. If the
firm is in late start-up phase with possibility of moving to rapid expansion phase,
buy the stock when it is still cheap. Once firm’s earnings start falling with
its products witnessing poor demand, it’s time to bid goodbye to the stock.
The
key parameters involved in Peter Lynch’s ‘two minute drill’ are:
1.
P/E Ratio: avoid stocks with excessively high P/E
2.
Debt/Equity Ratio: should be low
3.
Net Cash per Share: should be high
4.
Dividend & Payout Ratio: should be adequate
5.
Inventory levels: lower the better
Stay
away from companies which are being actively tracked, followed & invested
in by large institutional investors. News about buy back of shares or internal
stakeholders increasing their stakes should be construed as positive.
Checks
specific to Fast Growers:
1.
The star product forms a majority of the company’s business.
2.
Company’s success in more than one places to prove that expansion will work.
3.
Still opportunity for penetration.
4.
Stock is selling at its P/E ratio or near the growth rate.
5.
Expansion is speeding up Or stable
One
must judiciously walk the tightrope between the unquestioning belief that made
the stock to be held for so long and the fear of the end from nose-diving
prices due to a one-off bad year. The key is to always keep revisiting the
story & ask some pertinent questions like ‘What would really keep them
growing?’, ‘What is their next offering? or ‘Are their products & services
still in vogue?’ It is here, that one must track the point of time when the
phase 2 of the firm’s expansion comes to an end. This is usually the dead-end
for organizations as success is difficult to be replicated. Unless, innovation
happens, downfall is imminent & thus, an exit is necessary. P/E of these
stocks is drummed up to unrealistically high levels by the madness of crowd
towards the end. One must keep one’s eyes & ears open to signs, which mark
the end of the road for these fast growers. A great case in point is Polaroid
which had its P/E bid up to 50, only to be rendered obsolete later by new technologies.
A
sure shot sign of a decline is a company which is everywhere! Such a company
would simply find no place to expand any further. Sooner, rather than later,
such a company would see its ‘Manhattans’ of earnings reduced to ‘plateaus’ of
little or no growth, simply because no space is left to expand further.
1.The
quarterly sales decline for existing stores.
2.
New stores opening, though results are disappointing: weakening demand, over
supply.
3.
High level of attrition at the top level.
4.
Company pitching heavily to institutional investors talking about what Peter
Lynch calls ‘diversification’.
5.
Stock trading at a P/E of 30 or more, when most optimistic estimates of earning
growth are lower than 15-20%, thus, unable to justify the high price.
Fast
Growers, which pay, are ephemeral & one misses them more often than not. It
is a High Risk & High Gain Category of Stocks. One must remember along the
classic risk & return principle, that when one loses, one loses big! So, if
you are in the quest for magnificent returns, a Fast Grower can be your bet
provided you know when to bid Goodbye!
No comments:
Post a Comment