ValueHunt Capital : 1 ValueHunt Capital Special Situation – Event Driven Investment Strategy in Equity market19th September 2009ByDhananjayan J, ValueHunt Capital
About us : 2 About us Dhananjayan – Research Head, ValueHunt Capital
Chartered Management Accountant from CIMA, UK
Completed Masters degree in Financial Management
Completed one year executive program in applied finance from IIM, Calcutta
Worked 3 years for New York based Hedge Fund that invests in Special Situation Stocks around the globe
Worked for hedge fund managers in Europe and for investment managers there
Refer http://valuehunt.blogspot.com for our regular stock market updates.
Contact info - +919003079213 email – dhananjayan@valuehunt.net
What is stock? : 3 What is stock? Is it just a certificate that have some value in the market ? No
Is it just a entry in some electronic form in your DEMAT account? Not at all.
Stock or common stock of a company is a ownership rights in its business. If you own a stock of a company, you are a part owner of that company.
For example, if you own a share in Infosys Technologies Ltd, you are one among the owner of it along with people like Mr. Narayanamoorthy and Mr. Nandan Nikelikani.
So when you invest in stocks, you invest in the underlying business of that company. It is not just a piece of a paper or an entry in electronic form
Is stock market is a means of getting rich quick? : 4 Is stock market is a means of getting rich quick? Answer is big “NO”. We don’t encourage trading..
Here is the famous quote by Benjamin Graham
“in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine “
Stock market is not quick rich formula
Short term Vs Long term
Nothing is predictable in short term but in long term value of business traded in stock exchanges can be predicted with degree of certainty
Evidence for Profitable Long Term equity investment : 5 Evidence for Profitable Long Term equity investment
Evidence for Profitable Long Term equity investment (contd) : 6 Evidence for Profitable Long Term equity investment (contd)
Why investment in stocks ? : 7 Why investment in stocks ? Why not in Fixed deposits, Government of India bonds, State Government bonds, Insurance, Commodities, FOREX, etc?
Because “Equity is hedge against Inflation”
Historically, there is imperial evidence to support this fact.
But how to earn return in wild market movements? : 8 But how to earn return in wild market movements? But how to earn in the wild fluctuation in the stock market direction?
Follow World 2nd richest man Mr. Warren Buffet’s advice – Be fearful when others are greedy and be greedy when others are fearful.
This is called “Contrarian Investing”
How to pick stocks in this big universe of stock market? : 9 How to pick stocks in this big universe of stock market? Two approaches
Top Down
Bottom Up
Top Down Approach
Select the industry in which you want to invest
List all the traded companies in that particular industry
Analyze all those companies with a valuation tool
Select the best undervalued company
Invest in that company and stay long
Example : http://valuehunt.blogspot.com/2009/09/valuehunt-analytical-model-on-indian.html - Our model on Indian Cement industry
http://valuehunt.blogspot.com/2009/08/indian-real-estate-sectors-nav-pnav.html - Our model on Indian real estate industry
Top down approach : 10 Top down approach Here we pick stocks from some of the events that is happening in the market on periodic basis
Those events are called “Special Situation”
Spin-off or de-merger
Companies that split their portfolio of businesses into separate companies
Benefit to investors - this will create extra value for the shareholders
Example – Godrej Consumer Products Ltd from Godrej Industries Ltd, Reliance group of companies, etc
Special Situation – contd…. : 11 Special Situation – contd…. Divestiture of non-core business or loss making business
Cash inflow happens – this will increase the financial position of the company
When loss making segment is sold off – EPS will increase
When non core biz is sold off – earning potential of the core biz would grow well
Stock Buyback
Best way to return money to the shareholders
Biz with net cash is good sign here
Will increase the value for remaining shareholder
Example – Oil Country Tubular Ltd, FDC Ltd and Mangalam Cements Ltd
Special Situation – contd…. : 12 Special Situation – contd…. Insider trading
Who is an insider to a company?
CEO, Chairman, promoter, major shareholders, etc
Why insider trading is important?
Who knows better than the manager or owner themselves?
Major shareholders get chance to communicate to managers while ordinary shareholder like us don’t have that chance
Example 1 – Red signal given by promoters of Satyam Computers Ltd when they mortgaged or sold their stake
Example 2 – Green signal given by promoters of Deccan Chronicle, Aptech (Mr. Rakesh Jhunjunwala bought huge stake in dec 08), ICSA India Ltd, … there are many example in this case.
Special Situation – contd…. : 13 Special Situation – contd…. Restructuring of business
Emergence from bankruptcy – Example IFB industries Ltd
Management change
Special dividend
Debt pay down
Companies with net cash in their balance sheet
Out of favor business through various screens
52-week low,
high dividend yield,
plungers, etc
Do we just pick stocks through special sit screens? : 14 Do we just pick stocks through special sit screens? No. We just don’t stop there. We further screen the list of stocks in the following angles.
Company analysis
Business analysis
Industry analysis
Management analysis
Peer group analysis
Initially we adopt our own “ValueHunt” modelware and see whether the stock have the potential to growth further.
Circle of Competency : 15 Circle of Competency We invest in business. If you are a businessman, will you invest in businesses that you don’t understand? I guess you won’t. Same is the case with stock investment.
Businesses that you know and understand is your circle of competency
We don’t invest in businesses that we don’t understand
Businesses that are out of our circle of competency
Airlines
Some biotech biz where even a scientist won’t understand what the companies are doing!
NDFC’s
Valuation Tools : 16 Valuation Tools We use the following two valuation models
Discounted Cash Flow
Relative Valuation model
ValueHunt Modelware
We employ some “reverse engineering” using DCF model with current price as base
Here we estimate the expected growth in earnings of the company in future
If that rate is below than our estimated growth in earnings, the biz is undervalued or else it is overvalued
How do we recommend stocks? : 17 How do we recommend stocks? We use our valuation tools and mental model to arrive at a value of a business
For instance, if we arrive at Rs. 100/- as value of the business per share, we recommend to buy at Rs. 50/- per share.
Why Rs. 50/- ? Why not Rs. 80 or Rs. 75/-?
Because you have a hedge called “Margin of Safety”
Legends who we follow : 18 Legends who we follow Benjamin Graham – Father of value investing and mentor of Warren Buffet
Warren Buffet – world’s most successful value investor
Charles Munger – Man behind Warren’s success
Robert Shiller – Professor of Yale university and author of book called “Irrational Exuberance”
Legends who we follow – contd… : 19 Legends who we follow – contd… Aswath Damodaran – Professor in Stern College, New York. He is our guiding force behind our valuation model works
Sanjay Bakshi – Professor in MDI college, Gurgoan, India
Parag Parikh – Chairman of Parag Parikh Financial Advisory Services Ltd and author of books “Stocks to Riches” and “Value Investing and Behavioral Finance”. His books introduced us to the concept of “Behavioral Finance”
Books that we follow : 20 Books that we follow “Intelligent Investor” by Benjamin Graham
“Security Analysis” by Benjamin Graham
“Buffett way”by Rob Hagstorm
“Irrational Exuberance” by Robert Shiller
“You can be a stock market genius” by Joel Greenblatt
“Common stocks and uncommon profit” by Philip A Fisher
“Stocks to Riches” and “Value Investing and Behavioral Finance” by Parag Parikh
“Damodaran on Valuation” by Aswath Damodaran
And many more books
ValueHunt Capital portfolio Service : 21 ValueHunt Capital portfolio Service We do fund management for people based on this concept
Who are our clients?
People who could invest for long term in stocks
People who don’t have immediate requirement for the money like child education, medical treatment, house commitments, etc
People who have the virtue to wait for the correct opportunity to come in their way – because stock market is not a quick rich formula
How do we communicate to investors? : 22 How do we communicate to investors? Currently we communicate to our investors through our blog:
http://valuehunt.blogspot.com where we give our views on the market as well as our periodic recommendations
Our website www.valuehunt.net is under construction. It will be live within few weeks from now
We also publish our “ValueHunt Daily Morning Note” where we come out with valuable information like daily special situation stocks, indices movements, currency movements, commodity price quotes, insider trading, etc
We are also in the process of publishing our periodic valuation reports on companies and weekly newsletter
We also plan to communicate with you through webinar like this…
Slide 23 : 23 Thank you
Disclaimer : 24 Disclaimer The information contained herein has been prepared for internal purposes of ValueHunt Analytics & Co (“VH”) and is confidential and may not be reproduced or circulated in whole or in part. All information contained herein is proprietary to VH and any third party in receipt of such information should return all copies of such information to VH. Under no circumstances is this presentation to be used or considered as an offer to sell or solicitation of any other to buy any security or an agreement to underwrite any security or enter into any proposed transaction. Any opinions expressed herein are subject to change. None of VH or any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness information contained herein.