I am usually looking for new ideas on a regular basis. It is not difficult to find a good company, but the challenge is in getting a good price. High quality companies with competitive advantage and good management usually sell at or above fair value, unless these is an industry specific issue or a macro scare which causes the price to drop below the fair value.
As one cannot know in advance (at least I cannot) when the market will throw up bargains, I tend to analyze a company and then park it in my buy list. I use this list to track the price to fair value and to evaluate the fundamentals of the company on a regular basis.
Let me give two examples to illustrate how I track these companies. The notes below are my rough notes and thoughts.
Intrinsic value : 410
Company description: The Company is the no.1 vacation service company with 70% market share. Company has 125K time share customers. In addition company also has travel and is now catering to corporate customers too.
Reason for buying:
1. Company has an ROE in excess of 25%, 0 debt and net margins of 20%+
2.Company has grown topline at 30%+ and profit @ 50%+. Likely to grow at 20%+ levels in future
3. Company has been in biz for 15 yrs, has a well know brand, extensive distribution/ sales network and also 35+ properties
4. Company is adding new properties and adding new products too.
5. Good growth is likely as domestic tourism is growing rapidly and company has captured only a small piece
Reasons for not buying:
1. Valuations are high @ 20 times earnings
2. Company slowed down in 2011 to improve process and business (need to dig into it). Also customer churn not clear – could be high (10%?)
Current thoughts (as of 4th Jan)
Not creating a position mainly due to valuations
Company description : The company is the no. 1 mfg of automotive and non- automotive cables. It has the highest market share in the domestic market.
Reason for buying
1. The company has maintained an ROE above 20% for the least 10+ years.
2. The company has compounded topline and bottom-line by 20% in the last 10 years (although the growth has been in spurts)
3. Company is sole supplier to companies such as Hero Honda, Bajaj and also supplies to companies such as maruti suzuki, GM, BMW and other global companies
4. Competitive advantage from scale, good customer relationship and smart management.
Reason for not buying
Company has had periods of low and high growth. Auto business is slowing down and we could see slowdown in growth and margins in the next few quarters. Should evaluate in the next 2-3 months
Current thoughts (of 17-June)
Check Q2 results and then take decision. Risk is the company would continue to do well and the price may run away (less likely as auto smaller auto companies do not get high valuations).This is unlikely to be a PE re-rating idea and more a EPS expansion idea
Why do this ?
I started maintaining this list in the last 2-3 years. There are multiple reasons for it.
The first reason is that I don’t have a very good memory and cannot remember the analysis of a company after some time. I could always delude myself, but think that accepting my limitations is a much better alternative. Once I have analyzed a company, I keep rough notes in this buy list and can refer to it regularly. This helps me in tracking multiple companies and allows me to benefit from my past work.
The second reason for keeping these notes is that the price may not be right at the time of analyzing the company. As a result, if I keep a note of the company, I am able to act quickly when the price drops below my target range. A lot of times such a window opens up for a short period and it makes sense to act quickly at that time. For ex: financials and banks in Dec 2011. It is difficult for me to analyze a company in depth in a short period of time and all the work done in the past is very useful at such times.
The final reason is that this list is a repository which will keep building with time as I analyze more and more companies. This should help me in tracking companies and acting on them quickly at the right time. It’s like my personal gold mine 🙂