I had written a note about Selan exploration here . I will not repeat the analysis as the main thesis laid out earlier, still holds true.

An update
The company is cheap from multiple perspectives – enterprise value per barrel of oil reserves, EV/EBDITA etc. However due to lack of timely clearances for drilling new wells, the production and profits have stagnated for the last few years. As a result, the stock price stagnated for a few years, before the recent run from the 200 levels to around 620 now.

The company has recently started receiving approvals and has been able to re-start the drilling program. As per the latest annual report, the company has been able to drill around 10 wells and is in the process of completing the same (connect the drilled well to pipelines or other modes of transport)

In addition to the above disclosure, there is another very key variable which is showing an upward trend – development of hydrocarbon properties. This is the cost incurred by an oil and gas company to prospect for locations for new wells and then drill the well and complete it. The company has spent close to 80 Crs in the last four years in prospecting for new drilling locations.

The more interesting bit is that the company has ramped up the actual drilling and completion expenses in the current fiscal which has jumped up from 6 crs to around 55 Crs. This is a very critical variable to track as oil and Gas Companies need to drill new wells to grow production (and hence profits and cash flows).

We cannot be sure how many of these wells will be successful and when exactly they will come online. At the same time, the typical lead time from start of drilling to production of oil and gas varies between 6-9 months. So we are in effect talking of about 3-6 months of time for the oil production to ramp up.

In addition to the above, the new government seems to be focused on improving the speed of clearances and get projects moving on the ground. Considering that approvals came to standstill in the last few years, any progress on this front will help the company tremendously.

This is not a core position
This is not a big position as i think it is risky for the reasons already detailed in my earlier post. Let me repeat the key ones

-          The company has inadequate level of disclosures for an Oil and gas exploration company
-          The management provides the minimum level of commentary on the performance and outlook for the company. There are no interviews, quarterly conference calls etc. In effect short of speaking to the management directly, there are no publicly available sources of information. One is driving through a foggy windshield and being forced to make inferences based on published data

In view of the above, I have around 2% of my portfolio allocated to this idea and may add more if I think the price is getting attractive.

Please do not consider this to be a stock recommendation and do you own homework. Please read the disclaimer if you still have some doubts

 
 

This is my ‘twice a year’ sales pitch where I try to convince you about my brilliance :). I recently shared this update with the subscribers of my paid service.
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Capture

We have achieved our stated goal of 3-5% outperformance relative to the indices. The model portfolio has now outperformed the indices by around 20% on an annualized basis (after considering dividends). This has been achieved while holding around 10-20% cash at various times.

If you wish to read further – please download the rest of the document from here

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What is worse than losing 100% on a stock ? It’s missing a 10 bagger !

What’s worse than missing a 10 bagger ? It missing a 10 bagger which you identified and decided to take no action inspite of knowing about the company. Now you must be thinking – that’s quite dumb ! In a way it is, but as always the story is more nuanced than just being dumb.

So what’s the name of this mystery company ?

Let me give some more hints :) ..I wrote about it in July 2010 when it was selling for around 80 Crs market cap. It now sells at around 1400 crores. That’s a 20 bagger excluding dividends during a period where the market has gone nowhere.

I won’t tease you any more ….the company name is Mayur uniquoters! See the post here .

Now I can assign this to bad luck and move on. However I have never operated this way – I want to dissect each failure – failure of losing money or failure missing out on a 10+ bagger.

How did I miss it?

I wrote about this company in July 2010 when it was a micro cap and started a small position in the company. I was comfortable with the financial performance of the company, but was concerned with a corporate governance issue – issue of warrants to the promoter at below market price, when the company did not really need the extra capital.

As the stock price rose, I lost interest in the company and sold my small position as I was not comfortable with the corporate governance issue. In hindsight, I do not fault myself for this decision – it was the right thing to do based on the facts known to me at that point

The downside of labeling

So where did I really go wrong? As I look back, I can attribute the failure to a label I attached to the company. I was not comfortable with the management and attached the label of ‘poor corporate governance’ to the company.

After I sold my position in 2010, I continued to track the company and could clearly see the good performance. Inspite of the facts, I refused to change the label and remain locked to an existing view although the management did not show any new governance issues.

First conclusion or confirmation bias

The other name for this locking is called the first conclusion bias (read here). Once I had reached a conclusion I refused to change it, inspite of evidence to the contrary. It is only after the evidence became too obvious to ignore that I have revisited my conclusion and realized the flaw in my thinking

The illusion of high valuation

If mayor uniquoters was an isolated example, it would have been comforting to ‘label’ it as an aberration and move on. However there are a few more examples (atleast ones which are obvious to me).

Let me give another example and the back story behind missing the multi-bagger

Hawkins cooker: This stock was pointed out to me in 2010 when the company was selling at a PE of around 15. The company was and is easy to understand, has great economics and a wonderful management. So if such a company was presented to me on a platter , why did I ignore it ? The single word for that is valuations – The Company was selling at a PE of 15+ which in my mind was expensive.

I started off my investing life with high quality companies such as asian paints and Pidilite selling at reasonable valuations (15-18 times earnings) and slowly graduated to graham style low PE stocks (the reverse of most people). Over time, I got locked into a mental model where I started equating a low PE with an attractively priced stock and a high PE with an expensive stock.

The above thought process holds true in isolation, but it is important to consider the PE ratio in context of business quality. A business with weak economics is a bad stock even if it has a low PE and an exceptional business with a moderately high PE can still be a great stock. I have been aware of this fact, but still had to relearn this important concept all over again

How to change your mind ?

It would be safe to assume that if you are presented ‘data’ which contradicts your assumptions, you will change your prior conclusions ? Atleast not in my case !

Let me point to two extreme example –

Ajanta pharma has been a multi-bagger since it was pointed out to me by a very smart investor – Hitesh. I still have the email in which he shared the idea with me in 2011. At that time, I was not comfortable with pharma companies and thought that I could not judge Ajanta’s future prospects accurately.

That’s a reasonable argument and can be a plausible reason, but for the fact that this idea was posted on the website – valuepickr by Hitesh and donald. This website is run by Donald Francis and it has a lot of good investors who write regularly on it. The good thing about this forum is that Donald, Hitesh and ayush have encouraged a long term investing mindset with a focus on the process of investing. I am not praising the website due to any vested interest (I don’t have any), but think that one should read through the analysis on some of the picks made by the team

I personally follow this site and occasionally post on it too. Ajanta pharma and Mayur uniquoters are two such ideas which were posted on this site and analyzed in a lot detail. I have been following these companies over the last few years and inspite of over whelming evidence did not take the plunge

So much for changing my mind based on evidence  !

How to change ?

The first step in fixing a blind spot is recognizing one. Now that I have recognized multiple biases in my case, I have started focusing on the following points in my investment process

-          Do not equate a high PE with expensive. Analyze the business in detail and determine if the company can still double in 3 years at current or slightly lower valuations

-          Focus on quality before valuations

-          Constantly question my own conclusions. I have started doing this after each quarterly result – does the company match the original thesis (positive or negative)? Do I have access to some new non-quantitative information which should prompt me to revise my original thesis ?

I have already made changes in my stock picks in the recent past and the initial results are good. In summary I think there is a lot of value in analyzing the success of other people  – not to be envious of them, but to reverse engineer it and improve your own process.