Saturday, October 14, 2017

WHAT IS TURNAROUND INVESTING ?

Courtesy : internationalbanker.com



Value investing is one of the most common approaches to investment, a strategy that involves picking stocks based on their intrinsic values. Should a company’s value—as measured through a range of methods—be considered worth more than the current price of the stock, the company is likely to be deemed as being undervalued and therefore ripe for a recovery. Such stocks are highly sought after by value investors, of whom some are the most respected investors in the industry, such as Warren Buffett and Seth Klarman.
One of the main facets of value investing is turnaround investing. This involves taking a position in a stock that has fallen out of favour—often due to bad news initially associated with the company—and is therefore not perceived by the majority of investors to be a worthwhile consideration. Profound financial and operational issues are likely to have severely dragged down the company’s stock price and its business model. A turnaround stock, however, will continue to have a higher intrinsic value than asserted by the majority. This means that it remains an attractive investment option as its stock price is likely to recover—or “turnaround”—in order to reflect this true value.
Companies that are in need of a turnaround have often suffered a consistent decline in their financial results, which in turn has resulted in a loss of investor confidence and ultimately a collapse in their share prices, as positions are sold en masse. This leads to companies trading at heavy discounts that eventually become ignored by the majority—but noticed by value investors. If the company announces efforts to turn the company around, it is likely that improved financial performance will follow. Such an announcement, therefore, often results in an increased stock price. However, it is also the case that management realises that positive change doesn’t transpire as quickly as intended, if at all, which is why it is worth waiting to see if such pronouncements translate into visible, sustainable improvement in the company’s underlying fundamentals. If the factors that caused the company’s initial demise appear to be duly addressed, then an investor can be more assured that a successful turnaround is imminent.
Indeed, a turnaround often involves preventing the company’s deterioration by implementing stabilisation measures, through cutting costs, selling non-vital assets, divestment or even changing the entire focus of the business or the way it markets its products. It may even involve filing for bankruptcy in order to alleviate some of its debt burden. Many US coal companies, for example, have filed for bankruptcy to eliminate much of the debt they amassed when coal prices were at all-time highs, at the beginning of the decade. Whether they are successful in posting comprehensive recoveries, however, remains to be seen.

Investing in turnaround stocks can often be a risky strategy, given that not all companies that implement recovery measures will rebound. Indeed, many will continue on an inexorable decline. Many companies have long-term management woes, issues with product marketing, are in cyclical decline, or are facing legal action. This means that repairing the company’s balance sheet is only one measure required for the stock to rebound. Management may have to be overhauled, costs may need to be reduced, new products may need to be developed, and lawsuits may require settlement. Moreover, investing in turnaround stocks invariably involves going against the grain and being a contrarian in relation to the majority of the investment crowd. Investors feel reassured that they are making the right decision when others are doing the same. With turnaround stocks, however, the majority ignore the true value and remain focused on news associated with the company’s fall from grace. Therefore, investing against the consensus view generally requires a degree of independence, as well as discipline in staying true to the company’s valuation metrics.

There are a number of ways to measure a stock’s valuation, including the price-to-earnings ratio (P/E) and the price-to-book-value ratio (P/BV), which involve examining the company’s earnings and debt levels and comparing them to its stock price. Asset-based valuation is also a popular method to determine intrinsic value, which essentially involves calculating the difference between a company’s assets and its liabilities. Different parameters provide different valuations, which makes it wise for the investor to calculate true value using a range of methods.
For those willing to perform a more detailed analysis of the company’s value, investment opportunities can arise as the true value eventually causes the stock price to rebound. This may require obtaining information on the target company that is difficult to come by. The benefit that arises from this method, however, is that because the stock price has already fallen substantially, any further “bad news” can often be deemed as having been “priced into” the stock value with the assumption that the majority of investors have effectively written it off.

An example of the emergence of turnaround stocks can be seen in the widespread collapse of global equity markets during the global financial crisis of 2007-09. As investors panicked, stocks were sold across the board. This resulted in many stocks—and indeed, entire sectors—falling out of favour with the main investment crowd. As such, several companies with strong fundamentals presented investors with attractive buying opportunities, given that their true values remained relatively strong. Given that global equities have largely been suffering from a bear market in 2016’s first quarter, understanding the turnaround concept remains just as important today for the value investor looking to unearth hidden gems. 

It is also useful to have an exit strategy with potential turnaround stocks, given the risk posed to the investor of the stock continuing to decline. This makes exiting such a position a much more subjective process as compared with other stocks. Therefore, it remains important to continue monitoring the measures taken by the company to improve its business, how upbeat and optimistic the management has remained, and the price of the stock in comparison to its industry rivals.

 Turnaround investing may lose investors a sizable amount of capital if the company cannot complete the intended turnaround. However, if it works, significant upside will emerge as the stock rebounds.


Saturday, October 7, 2017

PLEASE NOTE ...

Receiving lot of queries regarding my Facebook account . Please note that, I have no active Facebook account to recommend stocks  currently and not recommending stocks through anyone's Facebook account.

Saturday, September 30, 2017

RAMKY INFRASTRUCTURE LTD -UPDATE

Ramky infrastructure is one of my biggest failures , suggested @ Rs.280  came down to Rs. 23 and currently trading around Rs.97.For the past many years company's performance severely affected in tandem with overall performance of the industry. It is clear from recent balance sheet that company taking sincere efforts to reduce debt and came back to business. In a  positive development, today company informed its decision to allot 1.2 Cr warrants ( to be converted into shares) at a price of Rs.101. Along with  promoters, Aadi financial advisors LLP ( an entity related with well known Bhanshali family) participating in this preferential allotment. I strongly believe, company now at an inflection point and those invested earlier will not regret and hope their patience will pay in the years to come.

Link to today's Announcement HERE


Disc: Holding shares , hence my views may be biased

Monday, June 12, 2017

How to balance fear & greed when stocks are at their peak...

Courtesy : Economic Times
 The domestic equity market is on a roll with the benchmark indices currently hovering at all-time highs. The highlight of the current rally is undoubtedly the active participation of domestic institutional investors (DIIs), who, along with foreign investors, have collectively invested Rs 84,793 crore (year-to-date) in domestic stocks for the year till May 31, 2017. (Source: Sebi)

Though it’s heartening to see retail investors embrace financial products, especially invest via the SIP route, now is the time to take a look at one’s portfolio. Historical pattern suggests whenever the market rallied on account of increased liquidity, it has always turned volatile in the short run.
From a valuation perspective too, the market is no longer cheap. For example: the trailing price-to-earnings (PE) multiple for the S&P BSE500 index is trending above its long-term average with more than 25 per cent of its constituents trading at 40 times their trailing 12-months earnings, which is the highest ever for these names. (Source: BSE)

In such interesting times, it is imperative for investors to revisit some of the investment fundamentals; the important one being striking the right balance between greed and fear while investing. It is always better to exercise caution than be sorry and regret later, particularly, when equity prices are soaring at an all-time high. This rally is happening especially at a time when earnings are yet to catch up.

Over the past three years, India Inc’s earnings growth has not lived up to expectations due to multiple factors. However, going forward, this landscape is likely to improve given the positive macro-economic factors and a steady recovery in the economy. Also, the positive effect of the recent government reforms is likely to further help the recovery process.

Once the earnings growth materialises, there is a possibility that valuations may get realigned with historical valuations.

As Charlie Munger, American investor, businessman, and well known philanthropist, aptly said, “All intelligent investing is value investing – acquiring more than you are paying for. You must value the business in order to value the stock.”
When the market has been on a roll, investors often tend to seek more gains from their investments. With the market inching upward to new all-time highs, investors generally tend to become greedy expecting further gains. This may not necessarily be the right move and calls for rebalancing of portfolio.

As the value of the equity component of your portfolio goes up, your original balance can get skewed. However, investors should always keep in mind that no asset class will move in one straight line, be it upward or downwards for a long time. This holds true, especially for financial assets, as the volatility is more pronounced in them.
At this point, a retail investor should ideally take a hard look at one’s portfolio. With the rise in the market, the portfolio value may have swelled and one may be tempted to make fresh investments to capture most of the opportunities offered by the market.

But this is the time one has to be cautious and fortify the gains. Given this objective, the right thing to do for retail investors would be to invest in dynamic asset allocation funds/ balanced advantage category of funds. These funds invest in equity or debt as per the attractiveness of that particular asset class and dynamically manage the same. When equities are cheap, the fund allocation towards equity increases in order to tap the available opportunities and vice-versa.

The construct of these funds ensures that an investor has exposure to both debt and equity asset classes within a single fund. The matrix used to arrive at the proportion is generally based on relative attractiveness of each of the asset class and, hence, these funds are dynamically managed.
While current market valuations do appear expensive from a short-term perspective, as the market has more or less factored in this year’s earnings growth, long-term investors can consider remaining invested as the economic growth rises to a robust 7 per cent plus, making India an attractive investment destination. Further, the bold economic reforms embarked upon by the government have set the stage right for good times for the Indian equity market.


The domestic equity market is on a roll with the benchmark indices currently hovering at all-time highs. The highlight of the current rally is undoubtedly the active participation of domestic institutional investors (DIIs), who, along with foreign investors, have collectively invested Rs 84,793 crore (year-to-date) in domestic stocks for the year till May 31, 2017. (Source: Sebi)


Sunday, May 14, 2017

Using Enterprise Value To Compare Companies


Courtesy : Investopedia

The enterprise value - or EV for short - is an indicator of how the market attributes value to a firm as a whole. Enterprise value is a term coined by analysts to discuss the aggregate value of a company as an enterprise rather than just focusing on its current market capitalization. It measures how much you need to fork out to buy an entire public company. When sizing up a company, investors get a clearer picture of real value with EV than with market capitalization.

Why doesn't market capitalization properly represent a firm's value? It leaves a lot of important factors out, such as a company's debt on the one hand and its cash reserves on the other. Enterprise value is basically a modification of market cap, as it incorporates debt and cash for determining a company's valuation.

The Calculation
Simply put, EV is the sum of a company's market cap and its net debt. To compute the EV, first calculate the company's market cap, add total debt (including long- and short-term debt reported in the balance sheet) and subtract cash and investments (also reported in the balance sheet).

Market capitalization is the share price multiplied by the number of outstanding shares. So, if a company has 10 shares and each currently sells for $25, the market capitalization is $250. This number tells you what you would have to pay to buy every share of the company. Therefore, rather than telling you the company's value, market cap simply represents the company's price tag.

The Role of Debt and Cash
Why are debt and cash considered when valuing a firm? If the firm is sold to a new owner, the buyer has to pay the equity value (in acquisitions, price is typically set higher than the market price) and must also repay the firm's debts. Of course, the buyer gets to keep the cash available with the firm, which is why cash needs to be deducted from the firm's price as represented by market cap.

Think of two companies that have equal market caps. One has no debt on its balance sheet while the other one is debt heavy. The debt-laden company will be making interest payments on the debt over the years. (Preferred stock and convertibles that pay interest should also be considered debt for the purposes of calculating value.) So, even though the two companies have equal market caps, the company with debt is worth more.

By the same token, imagine two companies with equal market caps of $250 and no debt. One has negligible cash and cash equivalents on hand, and the other has $250 in cash. If you bought the first company for $250, you will have a company worth, presumably, $250. But if you bought the second company for $500, it would have cost you just $250, since you instantly get $250 in cash.

If a company with a market cap of $250 carries $150 as long-term debt, an acquirer would ultimately pay a lot more than $250 if he or she were to buy the company's entire stock. The buyer has to assume $150 in debt, which brings the total acquisition price to $400. Long-term debt serves effectively to increase the value of a company, making any assessments that take only the stock into account preliminary at best.

Cash and short-term investments, by contrast, have the opposite effect. They decrease the effective price an acquirer has to pay. Let's say a company with a market cap of $25 has $5 cash in the bank. Although an acquirer would still need to fork out $25 to get the equity, it would immediately recoup $5 from the cash reserve, making the effective price only $20.

Ratio Matters
Frankly, knowing a company's EV alone is not all that useful. You can learn more about a company by comparing EV to a measure of the company's cash flow or EBIT. Comparative ratios demonstrate nicely how EV works better than market cap for assessing companies with differing debt or cash levels or, in other words, differing capital structures.

It is important to use EBIT - earnings before interest and tax - in the comparative ratio because EV assumes that, upon the acquisition of a company, its acquirer immediately pays debt and consumes cash, not accounting for interest costs or interest income. Even better is free cash flow, which helps avoid other accounting distortions.


The Bottom Line

The value of EV lies in its ability to compare companies with different capital structures. By using enterprise value instead of market capitalization to look at the value of a company, investors get a more accurate sense of whether or not a company is truly undervalued.

Tuesday, May 9, 2017

WEBSOL ENERGY - RESULT UPDATE

Websol Energy reported the above result for the March Quarter/Year Ended 2017. Even excluding other income ,company performed exceptionally well . More than the result, as per notes, company succeeded in its debt reduction efforts and at the same time doubled its production capacity.


Discl: Personally holding shares of Websol, hence my views may be biased.

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