When a friend suggested we should start investing in small-cap companies (companies with an m-cap of below 300 crs), I was the most vocal protestor. My skills are rather poor at influencing (Read: non-Caldini), and hence I too participated (though unwillingly) skirmish with investing in small cap companies 6-7 months back. It's turned out mighty profitable with annualised returns of over 65%. But the real celebration has been around the fact that inspite the increased stock price, our PE's in the companies have halved in the same time and the balance sheets have turned much stronger.
Some notes -
1. We're looking at growth companies .. so a current PER of 50 doesnt bother us (I have always supported companies whose current PEs were below 10, so you can imagine my dissent when "The Circle" would suggest a scrip which was at a high PER)
2. The topline has to grow .. and so should the bottomline .. and so should the DEBT in the company. We get frustrated with companies who donot actively use their balance sheet strength to pick debt from the market to finance growth. So a cash-rich, zero debt company would be placed in the CashCow quadrant of our investing map but then a low-cash/adequate-debt/growing company would be placed in the Star quadrant
3. There has to be news value. The management should have it's PR cell and ensure maximum face time with the media. We are not interested in reticent, passive management. Aggression is the key.
4. We did not look at share volumes (or liquidity). Afterall, they are companies in the making. The lower the volumes, less is the movement in shares .. management can get on with their work without worrying about stock movements (donot confuse this with pt 3)
5. Dividend paying companies .. dont bother. If the rupee invested in the company can give 1.2 next year, then we are game to zero-dividends. (I cant find a fixed deposit which can give me 20% p.a.)
Why tell you this now?
a) I was circumspect on how well it will do .. with time my confidence has improved. A stock market crash will only fortify it further as I can invest even higher sums then
b) The market is still fresh with many such companies (we found 4 such companies while reading the morning papers, over breakfast) .. just read the financials.
PS: The Circle is what my friends (and I) call this investing club of ours :-)
Saturday, May 26, 2007
The Circle and small cap investing
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2 comments:
Hi shankar
were you able to achieve your returns on small caps via a concentrated portfolio or did you select a large portfolio to achieve the same ?
second, did your small cap investing involve using the graham approach ?
third, with the strategy outlined above, are you not going in for higher risk ? high pe stocks can give high returns if you are confident about the prospects of the stock and the future performance supports it
regards
rohit
Hi Rohit,
1. The invested portfolio consists of 10 stocks, so it's small. And it's still passive investing .. buy and hold.
2. Grahamian logics were actually not totally discarded although themethodology was changed ("margin of safety" is still important). I found the debt recap system, better in identifying these stocks rather than NCAV.
3. Actualy we felt the risk we're taking is lower, because as compared to other stocks (where a bad quarter can increase P/E drastically), we were picking stocks whose PEs would reduce in time. E.g. 3 of these stocks reduced PEs every qtr for 4 qtrs. This was not due to a lower market ask price but promising results. Also we were mapping the balance sheet strengths on each stock, which means you know the risk you are taking.
Actually, a lot of what I learnt here was a flip to my investment style over the lasy 2 yrs. There's a huge difference, but Im getting the bigger picture.
Warm Rgds
Shankar
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