Long term investors typically search for stocks with high RoE. You can google Warren Buffett 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.
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.
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.
Bees are disappearing:
There was a book on bees mentioned earlier here.
Disclosure: Not invested