Growth Stocks and Returns

24May10

Though it is true that markets can at times behave irrationally over a few periods, that by the very sense also means that market is quite rational most of the other times. I was going through Rohit’s previous posts in the 2007-09 period and found many commenting on how one could have invested in Infosys in 1993 and made millions and how value investing approach may not find such companies. I agree partially to the same. There are two things which I feel are relevant to such investments.

– For every infosys there may have been many equally performing companies which may not have survived or gone down the drain. So it becomes extremely important to research good companies and track them for quite sometime. One option can be to make an investment initially and keep investing as long as the company performance is improving and the price is reasonable.

-It is important to get these ideas/trends before they become highly priced or well known. Hence one should also remember that “when” we identify an opportunity is very important. An opportunity identified after everyone has identified may not give us much returns.

In few old comments in Rohit’s blog, I noticed 4 companies discussed often as very high growth and how these companies were not discussed in the blogs. The 4 companies were Geodesic, Micro Technologies, Educomp and sometimes PRIL.

Lets look at the returns they have gives to shareholders over the last 3-5 years and lets see if that information tells us something.

Geodesic

It has grown its revenues and profits by 40-50% yoy.

If someone had invested 1 year back, returns would have been -5% against 85% of sensex

If someone has invested in Jan 2008, returns would have been -48% against 13% of sensex

Since Jan 2007, -10% returns for Geodesic against 65% returns for sensex

Since Jan 2006, -30% against 150%

Since Jan 2005, -65% against 180%

Since Jan 2003, +100% against +450%

Since Jan 2002, +1400% against +260%

Interesting isn’t it to know when one should have bought this growth stock, at least based on the rear view mirror.

One should have bought this in Jan 2002 and sold in Jan 2005 to have made 40 times in 3 years. In those 3 years it returned 4000% against 30% of sensex.

Micro Technologies

Jan 2009: +90% vs +50% of sensex   (Good beginning I say!)

Jan 2008: -40% against +10% of sensex

Jan 2007: -23% vs +65% of sensex

Jan 2006: -50% vs + 170% of sensex

Jan 2005: +100% vs +180% of sensex

Jan 2004: +470% vs +380% of sensex

To have made money in this share, one should have bought in 2004 and sold in 2008. It went up 10 times in those 4 years.

Educomp

Since Jan 2009: +1.5% against 20% of sensex

Since Jan 2008: -37% against +18% of sensex

Since Jan 2007: +189% against +68% of sensex

Since Jan 2006: +870% against +160% of sensex

The time to have invested was Jan 2006 and one should have maybe sold within 2 years since it went up 15 times between Jan 2006 and Jan 2008. Nice rear view insight. 🙂

If someone had invested in June 2007, which was a reasonably good time to have got excited about this stock based on crowd mentality, one would have made +12% till date. Not bad since the sensex would have given us +14%.

Pantaloons

Since Jan 2009: +80% against +25% of sensex (Good growth I would say!)

If someone had invested in Pantaloons in Jan 2007 they would have got just 10% return in 3.5 years compared to 70% returns of Sensex.

What is to be inferred from these patterns?

The lessons I have learnt is:

– Identify a trend much before it appears in CNBC TV18 (if it is discussed in CNBC, its probably the wrong time to enter into the stock) and invest in it. This is not impossible. It is possible though it needs lot of effort and insight on whats happening around us.

-If I am not smart enough for that, I at least should not be dumb enough to invest after everyone has identified the trend.

– In some of the above cases, if one had invested after the stock had been considered as a “growth” stock, usually in the last 3-4 years, one would have ended up performing far below the Sensex or marginally better than the sensex. Even though some of the companies have grown fast like Geodesic or Micro Technologies (even Rolta which was discussed before), the “cost to growth”, which can be equity dilution or high levels of investment (and hence no FCF) has resulted in market not recognizing them with very high valuations.

I have now started developing deep respect for the market when it comes to its behavior in the long run spanning 5-10 years. There are many companies which appear undervalued in traditional parameters, but if one defines Company Value as the discounted value of future free cash flows, these companies do turn out to be correctly valued.

I have also noticed how few people define companies as “Value Companies” and “Growth Companies”. The examples given are “If one has invested in HLL and P&G, which are value companies, one would not have made any money in last 10 years”. I think this is a wrong argument. Value is not separated from growth. What value investors like doing is not overpaying for growth. The price one pays is the key. Hence Educomp can be a value company at reasonable valuations. It is important to observe what price one would have paid for HLL and P&G 10 years back and what growth assumptions were built into that price. If one identifies a trend much in advance, one would get a share at value price with very conservative growth assumptions and the share price would grow as the company explodes. This is RJ style of investing. His definition of value is different. He does’nt just look at ROE numbers or D/E numbers. From what I understand, He tries to buy companies which can grow quickly pretty fast and he identifies this before others do and hence he buys growth companies before “growth assumptions” are built into the valuation. That is the key to multi baggers.

Disclaimer:

I am a relatively new to this sphere and may look like a fool 5-10 years down the line with some of these companies becoming multi baggers from here. 🙂

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One Response to “Growth Stocks and Returns”

  1. Hi,

    This is useful hindsight mirror analysis. It is interesting to note that one has to be invested in a company during the exact periods of stock price growth, else, irrespective of the fundamentals, one may not reap the expected rewards.

    How does one screen for such opportunities? Should one be regularly dipping into small cap pool look for such gems? Are there information sources that could alert one to such a gem?


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