RadioShack Goes Bankrupt [Feb 2015]

 RadioShack Goes Bankrupt [Feb 2015]

• It is big electronic store. In 2009, another electronic store 'The Circuit City' had went bankrupted.
• Learning: Retail has become price game and it is very difficult for physical store operators to compete with online retailers like Amazons, Aliababas, Flipkarts of world.
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Source: http://www.gamespot.com/articles/radioshack-goes-bankrupt/1100-6425169/

Oiling the Wheels

OMCs: 

• Positive impact on downstream oil companies because of lower subsidy burden. However, in short term they may suffer inventory loss (Oil stock which bought earlier before prices fall).
• HPCL is considered as best manged company among OMCs.

Paint companies:

• Paint companies use several crude derivatives. These account for 50% of input cost for them. However, full benefit of Crude price fall is not passed to Crude derivatives. Still operating margin can be enhance when Crude price are lowered.
• Companies serving Auto sector can also benefit indirectly because of increased demand of Auto. Nerolac is one such company which serve Auto sector.

Auto & Auto ancillary companies:

• Falling crude oil prices reduces operating cost of running automobiles and hence encourage people to drive more. This indirectly helps leisure industry.
• For India, fall in Crude price reduce inflation  as well as Twin deficits which in turn give way to central bank in lowering interest rate. Lower interest rate can boost demand for Automobiles. This helps Auto & Auto ancillary sector
• Tyre companies also benefit. Synthetic rubber is big part of input cost for Tyre companies. Tyre companies may be encouraged to buy synthetic rubber instead of natural rubber.
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Aviation:

• Fuel is 40% operating cost for aviation companies. Operating margin may increase. However, due to very high competition in sector, this leads to lower fair and these companies do not get  full benefit of it. Overall it is positive still this could not be reason to buy aviation companies.

FMCG:

• Crude Oil derivatives is big part of RM cost of several FMCG companies. packaging, creams & hair oils (personal cares), detergents.
• HUL, Dabur, Marico are direct beneficiary of falling crude prices.

Source: http://businesstoday.intoday.in/story/falling-oil-prices-will-bring-a-windfall-for-india-inc/1/215108.html

Notes: Motiwala Capital LLC - Fourth Quarter 2014 Letter

Motiwala Capital LLC - Fourth Quarter 2014 Letter

• Microcaps H and L were purchased at low valuations. Both exhibited strong earnings growth and were rewarded with higher valuations resulting in superb gains.
• Apple had a fantastic year, releasing exciting new products and continuing to return capital to shareholders via share buybacks and dividends.
• Visteon continued to divest non-core businesses and investors were happy
• Learning from Mistakes:
• Avoid High leverage, capex and high dividend payout combination in cyclical business. This is deadly combo for cyclical business. : Thye faced loss in Energy service companies having above deadly combo.The positions in North Atlantic Drilling (NADL) and Prosafe (PRSEY) hurt the portfolio returns by 6%. These were the biggest mistakes since 2011. Both companies are in the energy service industry, cyclical in nature and dependent on capital spending by large oil producers, which in turn depends on crude oil pricing. NADL and PRSEY had significant capital expenditures and high levels of debt. To add fuel to the fire, they had a high (75-100%) dividend payout policy. The combination of these three factors in a cyclical business is too risky. I will guard against this in the future.
• When the situation changes, SELL: They bought shares of Russian media company CTCM Media (CTCM) in March 2014 with argument “CTCM has a solid balance sheet and produces attractive free cash flows. CTCM was purchased for 10%+ FCF yield. When Russia moves out of the front-page news, I hope the stock would be higher.” After purchase, the stock appreciated by 25% despite Russia continuing to be in the headlines. The stock was still cheap and I continued to hold. However, in late September Russia passed a law restricting ownership of Russian media companies to 20% from the prior 50%. This was unexpected and the stock price took a 20% hit. Later the stock was also hurt by the rapid depreciation of the Rubble, which was caused by the rapid decline in crude oil prices. CTCM indirectly became linked to energy prices. My mistake here was not selling immediately after the media law change, which would have reduced our losses.
• Portfolio Composition: 'Generals' (generally undervalued equity investments that fit the value framework), Special Situations (generally undervalued equity investments that fit the value framework), and Cash.
• energy service industry: cyclical in nature, dependent on capital spending by large oil producers (i.e. indirectly, on crude oil pricing).
• Their failure in Russian media company suggests  Media company can be indirectly linked to energy prices. This is why second order, third order thinking is important.
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[Source: http://motiwalacapital.com/wp/wp-content/uploads/2015/01/Quarterly-Letter-Q4-20141.pdf]

Raamdeo Agrawal’s Five Blue Chip Stocks To Buy Now [Feb 2015]

Sun Pharma Ltd – massive opportunity ahead:

• Mega trends are there all across the board, but as far as the stock market is concerned, you can make money out of say, retail shopping and even pharma. The global generics industry is moving from Europe and America to India. The move is still on and it is a big thing.
• We are just about $10-12 billion probably at this point in time and it could be a $100-billion story. So there is a lot of story ahead and may be Sun Pharma is a leader. But there are many more Sun in the making, they could be a Rs 300-crore-500 crore company. So you have to spot those new entrepreneurs who are going to come up in that particular field.
• So there is a massive opportunity and there are lot of markets like European and Japanese markets, and we have not even started. Even in America, lot of segments are not being tackled, so the opportunity to penetrate these market segments is huge.

United Spirits – great business, monopolistic, strong brands, pricing power:

• We have a large population and drinking habits are very hard here among the people who can afford and yet the consumption levels are very low. Even though the unorganised market is very big, in the organised branded liquor market there is one major player and that is USL.
• India is probably world’s biggest brown spirits market and in that Diageo is the king, so we have a competitive situation where opportunity size is very large and players are only two. It is almost monopolistic as monopolistic as Bosch or something and it is very branded thing.
• United Spirits is all the makings of a great business. It has a great business opportunity, because competitive situation is quite crazy. You cannot enter the market that easily, you cannot create a Black Label or Red Label overnight, it requires a lot restriction in terms of advertising and doing business.
• They have the distribution and they have all the brands and the global technology to milk the customer. They will make you pay almost double in next 5-10 years as they have the pricing power.

Ajanta Pharma – Good business, good management, good growth, expensive but still a value pick:

• Ajanta Pharma is like a dark horse. This company is known to everybody. It is into domestic branded generics as well as exports to unregulated markets. Now, they are planning to venture in to regulated markets.
• They have grown fantastic, you can go see their numbers and guys are good. Business is good, management is good, growth is there, when I bought it, it was reasonably priced, today it is little expensive but still a good value pick.
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Reliance Industries – largest value migration story:

• The entire fuel retailing is a monopolistic industry and in that sense BPCL, HPCL, IOC are key players. But Reliance is making a mark, so value migration will happen. One of the biggest value migration in the making is Reliance getting into petrol, diesel retailing in a big way.
• Dynamics will change, it will be competitive to the rest of the three and Reliance has the biggest opportunity to Rs 1 lakh- 3 lakh crore worth of business because they are the refinery.
• Reliance Industries is going to be one of the largest value migration story that we will watch in next five-six years. If government does not disturb the promise of decontrol. I am quite sure that they will make it very big and very profitable so that is about Reliance.
• Reliance has the largest business in India and they do have not any risk of. This stock could be available at 5-6 PE multiple, very large, and competition of course building up.

HDFC Bank – scores well on values of business, management, growth & longevity of growth:

• HDFC Bank is available at three-and-a-half times-four times book. But PE multiple is only 21-22. While picking stocks one must look at PE ratio apart from growth.
• If we look at price to book, this does not reflect the longevity of growth. This is not a growth ratio, you have to look at growth parameters and growth ratio is best picked up by PE multiple, not so much by price to book.
• HDFC Bank it is always traded at a premium because growth has been solid and market share gain has been robust. Investors often do valuation without looking at values and the process of looking at values is business, management, growth, longevity of growth.

[Source: http://rakesh-jhunjhunwala.in/raamdeo-agrawals-five-blue-chip-stocks-to-buy-now/]

Fooled by a Percentage Into Catching Falling Knife! [Apr 2008]

• If you put something sweet in your mouth immediately after tasting a lemon, it will taste much sweeter than it really is. The contrast between sweet and sour gets accentuated if one experiences one taste immediately after the other.
• If you meet someone very attractive at a party, and immediately after that you are introduced to someone who, in contrast, is merely average looking, then the average person would appear to be more unattractive to you than would have been the case had you not met the very attractive person beforehand.
• The brain, operating at the subconscious level, is often influenced by the presence of false “anchors”. Anchors are pieces of information to which a mind tends to latch on to while making a decision. And the human mind will often latch on to false anchors created by various influences like availability or contrast.
• In contrast, a rational investor who practices wide diversification, knows that its inevitable that some of his picks will turn out to be duds. He does, not, however, let such outcomes make him miserable because he has trained himself to latch on to the right anchors such as the size of his portfolio, and not the percentage lost in a single position.
• A stock may have fallen 50 percent from its all-time peak in a market crash, may have gone below its 52-week low price, may have fallen below the price at which its shares were offered in a hot IPO, or may have fallen below par value. None of these things mean that the stock is cheap. A stock is cheap only if its price has fallen well below than what the company is rationally worth on a per-share basis.
• In contrast with underlying value which is the right anchor to latch on to, all time peak prices, 52-week low price, IPO price, and par value are all false anchors. If you blindly buy stocks merely because they have fallen well below some false anchors, thereby allowing contrast effect to make you feel that they are much cheaper than they really might be, then you are functionally equivalent to the man who is trying to catch a falling knife.

"We don't deal in absolutes. We deal in probabilities." - Seth Klarman 

Everyone does actually know this, but few people actually realize this.

"Proper allocation of capital is an investor’s number one job." - Charlie Munger

"Don’t 'fall in love' with an investment – be situation-dependent and opportunity-driven." - Charlie Munger

"Good ideas are rare – when the odds are greatly in your favour, bet (allocate) heavily." - Charlie Munger

"Remember that highest & best use is always measured by the next best use (opportunity cost)." - Charlie Munger