Views on Life & on Equity Investing

Wonder, Wealth & Abundance

ROE

with 7 comments

Long term investors typically search for stocks with high RoE. You can google Warren Buffett ROE.

http://www.gurufocus.com/news/151702/understanding-warren-buffetts-preference-for-roe

Or Charlie Munger ROE. There are books, cults, clubs dedicated to these two persons.

Whilst recognising the importance of RoE and fact that long term stock compounding will do no better than what the underlying companies’ RoE does, it has more often than not proven to be self defeating to search companies over RoE over 18%. Its the direction of RoE that makes all the difference, that direction is the land of 20-50 baggers. Rerating coupled with Earning Growth are multiplied to form what results in material dreams being realised.

I recently read a 60 page report by Garry Evans, head of HSBC Global Equity Strategy which validated my own conclusion.

Why ?

Companies which already have 30% ROE are either expensive (PE over 40, eg: Nestle, Unilever) that it would take decades of patience to compound at 20% or market size is saturated with few established leaders. In short, market has already recognised.

Companies with lowest ROE quintile have outperformed highest companies in highest ROE quintile, time and again.

In my search of past 50 baggers, I have found that companies with RoE in range of 12-18% are the most likely candidates for re-rating even though their sales growth may continue at 15% plus.

Rahul Paliwal, a friend of mine had a great call on Relaxo at 260 Rs, which I ignored as Titan was at 145 and other quality names were also cheaper. Nobody mentions that Relaxo was at 42 Rs in 2003 and only 32 Rs in 2009 after six years of penance. Management quality is at par with the best.

At my stage in life, while not even close to being a billionaire yet, I stopped watching CNBC five years back. In the past two years I stopped watch any TV interview, other than following a few companies. I have also stopped following experts and billionaires as I believe that in the Munger speak they are too narrowly focussed in a single squirrely field of expertise. I am finding and realising that life is most fulfilling when lived in harmony with the cosmic plan, knowing your full potential, your position in infinite, of which holding share certificates are infinitesimally tiny part, definitely not the heart, although I can add that myself included, we have given it a lopsided share in the grand scheme of things. Also, we are greatly under estimating our potential both spiritual and mental by consigning it to domain of insurmountability, impossibility or disbelief and something that would happen in a distant future.

Bees
——-
Found another small company (infact the only small company that I liked in Australia), with 60 years of successful operation, availble for 120 Crores INR, any Indian national should be able to buy, listed on ASX with 70% market share in Australia for the past couple of decades.

Company is available at only 7 times earnings and 5% dividend yield, which is higher than term deposit rates of 4 years. http://www.anz.co.nz/ratefee/Interest.asp?section=PTDNZ#PTDNZ

The company is a likely candidate for acquisition by Kraft or Nestles of the world.

http://www.capilano.com.au


Bees are disappearing:


http://embed.ted.com/talks/marla_spivak_why_bees_are_disappearing.html

There was a book on bees mentioned earlier here.

Disclosure: Not invested

Written by amitdipsite

September 23, 2013 at 11:25 pm

Posted in Uncategorized

7 Responses

Subscribe to comments with RSS.

  1. Amit,

    I have formulated an quant based portfolio investment strategy which is essentially based on buffett/munger's ROE/margin of safety concepts.

    This is a permanent all weather portfolio management strategy involving no leverage or derivatives and has performed exceptionally well. Past 3 yrs in a flat mkt its returned 18% CAGR & 10 yrs 30%+ CAGR.

    I wanted to touch base with you to see if we could have some sort of a partnership to implement this on a revenue sharing basis. I can share a presentation and have further discussion over phone or in person if you are in Bangalore.

    Let me know what you think.

    Pi

    September 24, 2013 at 2:54 pm

  2. Agree Amit

    Reading Relaxo analysis by Prof Sanjay Bakshi was a real eye opener. To be very frank, I would have never bought Relaxo even at 32. I would have concentrated more its historical ROE which at that point of time were not that great. But as you rightly say, one need to concentrate on the direction of ROE. If business enjoy competitive advantage and scalability, I think ROE will eventually catch up..

    Anil Kumar Tulsiram

    September 25, 2013 at 2:09 pm

  3. Hey Anil

    Other companies that are throwing 50%+ of market cap as cash flows are Gulshan Polyols, and Superhouse Group. Again capital intensive.

    Cera was something I liked but had only 14% ROE until 2009, bought at 30, sold at 80 Rs, and bought recently as high as 500+

    Amit Arora

    September 25, 2013 at 7:33 pm

  4. Hi amit are you tracking ashapura minechem?

    Pratul Lobo

    September 26, 2013 at 5:06 pm

  5. Thanks Amit.. Will definitely have a look and come back to you.

    Anil Kumar Tulsiram

    September 29, 2013 at 6:44 am

  6. Very interesting thought,one should look at the direction of RoE.

    One place I can look for is a co. increasing Profit Margin/increasing Asset Turns/play with capital structure to boost Equity Multipilers?? What else would indicate RoE of a co. going up??

    Nikhil Moryani

    September 30, 2013 at 1:26 pm

  7. Amit Sir,

    One stock you have mentioned on your recent post is Kovai Medical. It was generating more than 60 Cr Cash in 2013 with a market cap of 120-130 cr. Now its market cap is 10 times cash flows . It is repaying debt & should be debt free by 2018. They are looking for growth via their chennai expansion of 170-180 bed facility. But I couldn't understand how you calculated it to be a say 8 bagger from here. I can see value of equity will rise from here but what calculation have you done to expect it to be a 8 bagger. To me market cap will grow but how much that I don't know.Also if you can throw some light on how do you ensure that ROE will increase of any given stock, will be helpful.

    sarvdeep malhan

    June 14, 2015 at 7:09 am


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: