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MISPRICED STOCKS

AN OPPORTUNITY
Ashish Chugh
28/07/2018, Mumbai
@hiddengemsindia
Disclaimer/ Disclosure
• Stocks mentioned in the Course of this
presentation are only for the purpose of
illustration for better understanding of the
context & should not be construed as Buy or Sell
recommendation.
• Me or my family may have interest/ investment
in some of the stocks mentioned
• I am not a SEBI Registered Investment Analyst
or Portfolio Manager.
Smallcap Investing
The Thought Process
• Good Business – Potential for Growth – Good
People – Attractive Valuations
• Understanding of Risks – Key
• GROWTH – Inc in Sales & Profitability
• Multibaggers EVOLVE
• Greatest Profits come – UGLY DUCKLING
becomes a SWAN
• MISPRICED STOCKS – Most people ignore
probabilities and exaggerate risks
MISPRICED STOCKS
Where to Look for them.. ???
MISPRICED STOCKS – AN OPPORTUNITY
Scenarios ..

A. Capital Allocation – Perceived Wrong


– Natco Pharma – Acquired Drug Stores in US
– Balaji Amines – Built a Hotel

B. Short Term Negatives


– Balaji Amines – Capex taking time to start
– Capex done – benefits not yet – High Dep. &
Interest cost, Lower Profits
MISPRICED STOCKS – AN OPPORTUNITY
Scenarios ..

C. Perception of the Management


– Bombay Dyeing – 40-50/-
– Mirza International – 20/-
– Greenply Ind – 80 cr Mcap with 30 Cr PAT

D. Unnoticed by/ Disinterest of the Markets


– Atul Auto – 90cr Market Cap
– Acrysil India – 30-35 cr Market Cap with 5-6cr PAT &
5% dividend yield
MISPRICED STOCKS – AN OPPORTUNITY
Scenarios ..

E. Survival in Question
– “Everything doesn’t have to be the next Microsoft – we
may invest in a Company because the market thinks its
going to fail, and we don’t”
– GVK, GMR, Banking Sector, NCLT Companies

F. Hunting for Triggers – Futile


– Don’t hunt for Triggers – Focus on Business, Potential,
Valuations
– Don’t wait – Triggers can come from anywhere – a
well known investor entering, story being told to
market, Research reports etc etc.
MISPRICED STOCKS – AN OPPORTUNITY
Scenarios ..

G. Special Situations – Mergers/ Demergers/


Corporate Actions
– Marico Kaya
– Arvind Smartspaces
– Praxis Home

H. Actions of SEBI/ Stock Exchanges


– Periodic Call Auction/ GSM/ ASM/ Shell Companies
– PCA - Linc Pens -30/-
– GSM -Timex -35-40, Accel Frontline -30/-, Lotus
Chocolate
– Shell - SQS BFSI, Prakash Industries
Management Quality

• “Good Management to Wall Street means


nothing more than a company with three
consecutive quarters of rising earnings. Make it
four quarters and you have a Great
Management” ~ Ralph Wenger
Management Quality

• Extremely Important – more important in


Microcaps
• A Misunderstood Subject – An opportunity
• Perception – could be wrong
• What to look for beyond Perception
– No Equity Dilutions
– Expansions from Internal C/F & nominal Debt
– Gross Block , Sales , Profits
– Skin in the Game – High stake
– Dividend, Buyback, Creeping
Whats Important ..
• Not every Stock is a Multibagger – RISKY – Only few turn out
to be Big Winners
• Hold – Ride The Gains – Stay the Course
• Check whether Business (not Stock Price) is Delivering
• Track Performance/ Potential Growth vis a vis Valuation
• Have to give time for Business to Deliver – have to hold stock
without seeing Rise in Stock price
• Focus on VALUATIONS of Business
• INDEPENDENT THINKING
• Age of Information Overload- Give yourself sufficient time for
THINKING
• BE FLEXIBLE – Open to Change
• Don’t Focus on LIQUIDITY – Focus on being right.
• Pursue an Investment Style that Suits your Temperament