How to select stocks in a falling market for long term investments :
A Thread 🧵⤵️
(i) Cyclical / Non-Cyclical Business
(ii) Efficiency parameters
(iii) Valuation Ratios
(iv) Management / CG
Do Like and Share to help us educate maximum investors.
(1/n)
A Thread 🧵⤵️
(i) Cyclical / Non-Cyclical Business
(ii) Efficiency parameters
(iii) Valuation Ratios
(iv) Management / CG
Do Like and Share to help us educate maximum investors.
(1/n)
(i) Cyclical / Non-Cyclical Business :
• You will have to classify the business into either of these 2 categories.
• Cyclical companies follow the trends in the overall economy.
• They don't have pricing power and depends on external factors such as govt spending.
(2/n)
• You will have to classify the business into either of these 2 categories.
• Cyclical companies follow the trends in the overall economy.
• They don't have pricing power and depends on external factors such as govt spending.
(2/n)
• Commodities such as Steel, Aluminium, Copper, Basic Chemicals & Cement are included in Cyclicals.
• Real Estate, Auto OEMs and Airlines are also considered as Cyclicals.
• Understanding the difference between commoditised and specialised products is important too.
(3/n)
• Real Estate, Auto OEMs and Airlines are also considered as Cyclicals.
• Understanding the difference between commoditised and specialised products is important too.
(3/n)
• While basic petroleum-based chemicals (such as Caustic Soda) are cyclical in nature, Speciality chemicals which are having complex chemistry are non-cyclical.
• Speciality Steel is another example, which is mostly imported by India as of now.
(4/n)
• Speciality Steel is another example, which is mostly imported by India as of now.
(4/n)
• Now let's discuss about Non-Cyclical Businesses :
• Structural businesses always outperform the market when economy is growing slowly.
• Over a longer period of time, they can be your consistent compounders.
• Ex - FMCG, Pharma, IT & Gas etc.
(5/n)
• Structural businesses always outperform the market when economy is growing slowly.
• Over a longer period of time, they can be your consistent compounders.
• Ex - FMCG, Pharma, IT & Gas etc.
(5/n)
Conclusion :
• Cyclical businesses can perform better than Non-Cyclicals in an economy where growth is high.
• There will always be some exceptions like Shree Cements and Asian Paints, there were consistent compounders even though they were into cyclicals.
(6/n)
• Cyclical businesses can perform better than Non-Cyclicals in an economy where growth is high.
• There will always be some exceptions like Shree Cements and Asian Paints, there were consistent compounders even though they were into cyclicals.
(6/n)
(ii) Efficiency Parameters :
• 3 things which can make or break a business :
1. Operational Efficiency :
• Cost Optimisation
• Better Asset Turnover
• Higher Operating RoE/RoCE
(7/n)
• 3 things which can make or break a business :
1. Operational Efficiency :
• Cost Optimisation
• Better Asset Turnover
• Higher Operating RoE/RoCE
(7/n)
2. Capital Allocation :
• Prudent Capital Allocation
• Deploying Operating Cash Flows in strategic manner
3. Management & their vision :
• Past track record / guidance
• JV / MoUs to grow the company
• Rejecting short term opportunities for long term growth
(8/n)
• Prudent Capital Allocation
• Deploying Operating Cash Flows in strategic manner
3. Management & their vision :
• Past track record / guidance
• JV / MoUs to grow the company
• Rejecting short term opportunities for long term growth
(8/n)
(iii) Valuation Ratios :
• This is the most confusing and yet the most rewarding concept too if you can understand it.
• Few things which needs to be checked :
- RoCE of the business in last 5 years
- Historical P/E (Available on screener.in)
(9/n)
• This is the most confusing and yet the most rewarding concept too if you can understand it.
• Few things which needs to be checked :
- RoCE of the business in last 5 years
- Historical P/E (Available on screener.in)
(9/n)
• If RoCE has been on declining trend from last few years, research about how is the company trying to improve it.
• Always focus on longevity of high return ratios.
• Forward P/E has its own importance while calculating the fair value of any stock.
(10/n)
• Always focus on longevity of high return ratios.
• Forward P/E has its own importance while calculating the fair value of any stock.
(10/n)
(iv) Management / CG :
• Always bet on the Jockey & not the horse.
• It's very crucial to understand the viewpoint of management before investing in any company.
• Attend Con-Calls / Interviews / AGM to get the views.
• You can classify managements as :
(11/n)
• Always bet on the Jockey & not the horse.
• It's very crucial to understand the viewpoint of management before investing in any company.
• Attend Con-Calls / Interviews / AGM to get the views.
• You can classify managements as :
(11/n)
1. Aggressive : (Hungry for growth)
2. Conservative : (Taking calculated risks)
• It depends on your risk profile while deciding on which one should you bet upon !
• An efficient management will always focus on managing its working capital.
(12/n)
2. Conservative : (Taking calculated risks)
• It depends on your risk profile while deciding on which one should you bet upon !
• An efficient management will always focus on managing its working capital.
(12/n)
• How can you catch the CG issues :
- Balance Sheet - Higher contingent liabilities
- Annual Reports - Increase in salaries of KMPs while PAT has declined for the company
- Higher related party transactions
- Legal cases pending against KMPs
(13/n)
- Balance Sheet - Higher contingent liabilities
- Annual Reports - Increase in salaries of KMPs while PAT has declined for the company
- Higher related party transactions
- Legal cases pending against KMPs
(13/n)
"Always remember : When everyone is greedy, be fearful and when everyone is fearful, be greedy."
Track the business, valuation metrics, CG & decide.
I hope this thread will add some value to your analysis.
Thanks for reading !! 😊
(14/14)
Track the business, valuation metrics, CG & decide.
I hope this thread will add some value to your analysis.
Thanks for reading !! 😊
(14/14)
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