Stalk your Kill before Going after It

In our country, there is lot of good companies, unfortunately, everyone else also knows how good they are and hence, most of the time, their stock prices carry a premium. So what does retail investor like you and I do? Do we pay the premium and cost average our way in? Nope. There is a better way! Equity markets will not always behave in a rational manner. On any given day, the news of the day will drive it up or down – sometimes there is no basis to it. We all know it – it has happened, it is happening, and it will continue to happen. As a long term investors, we always have patience on our side which we can use to our advantage.


Preparing for the Hunt

I haven’t talked to any tiger, but based on National Geographic and Discover Channels, I have noticed that a tiger would never just get up in the morning and go for a kill. Same way you should not attempt to purchase company stock unprepared. Here are few steps.

  • Buffalo or Boar? Cow or cat? We must know what we are hunting for. A tiger goes for cows and buffalos based on his appetite, hunting capabilities, associated risk. Have you see them going after elephants (too risky) or cats (not worth the effort). Our homework must be done in advance to identify what company stocks would be good fit in our portfolio.
  • Where is the best place? Tiger knows the watering holes or grazing fields. We should understand the business and what price we are willing to pull the trigger. Tiger is less likely to chase his kill on mountain tops. We won’t find right prices for our company stocks in mass media.
  • Do you have sufficient bullets? Tiger does not stalk his kill when exhausted; neither should you stalk your companies without cash on hand. We must plan ahead and make sure we have cash accessible when that stocks’ price falls below our target. Tiger does not go full speed from start – tries to run down the prey for few seconds. Likewise you should start with starter positions with less cash. Don’t jump with all the cash in hand.

  • Tiger gets the Kill. A tiger does not expect to get their kill at every stalking or within few minutes. Sometimes it has stalk on multiple occasions or it has to stalk for few hours. Saves energy like cash and goes after only when confident of own instincts. Stalking a company and waiting for dip to our buy price can take months or years, but in the end you will get an opportunity.


Does stalking work?

Yes, it does. I keep a watch of stocks along with their buy price range. I patiently wait for prices to fall in my buy range. Following are few companies on my watch list that I am stalking for quite a while.

  • Blue Star Limited (BLUESTARCO) is India’s largest central air conditioning company. It focuses on the corporate and commercial markets. Blue star has a good brand image and leading market share in Indian central air conditioning industry. It is well positioned to take part in infrastructure growth and office building construction. I expect the company to grow along with the growth in Indian economy. My buy price range is Rs 175 to Rs 225.

  • Gujarat Gas Company Limited (GUJARATGAS) is India’s largest private sector company in natural gas transmission and distribution for industrial/domestic customers. Few key aspects that I like about Gujarat Gas are its business model of gas distribution and practically debt free balance sheet. My buy price range is Rs 137 to Rs 156.

  • Asian Paints (ASIANPAINT) is India’s largest and Asia’s third largest paint company. It is a vertically integrated paint company with in-house manufacturing facility. The industrial coating segment consists of automotive coating, powder coating, and protective coating. One notable aspect that I like about Asian Paints is that, it has been able to expand globally without taking on too much debt. My buy price range is Rs 626 to Rs 826.

  • Lakshmi Energy and Foods Limited (LAKSHMIEFL) is engaged in manufacturing and processing food grains and related products. It has taken quite a bit of debt to fund capacity expansion and entering new markets. An intriguing company, which could be an opportunity, depending upon price paid. Since it is in transition, stock price in the market is battered down. My buy price range is Rs 63 to Rs 73. I got my kill!

  • Praj Industries (PRAJIND) provides turnkey plants and equipments for fermentation and distillation systems used in bio fuels processing. It has been battered by slow down in its primary product segment. But, I like company’s recent moves to diversity its product base, negligible debt, focus on environmental engineering projects, and management’s profit sharing philosophy. My buy price range is Rs 63 to Rs 68.

  • Visaka Industries Limited (VISAKAIND) is engaged in two businesses viz., building products and textile synthetic yarn. The area of concern is recent debt binge. It has more debt than its ability to generate cash from its operations. I consider this as risk which needs to be monitored. This increases sensitivity to economic downturns. My buy price range is Rs 153 to Rs 186. I got my kill!

  • NIFTYBeES ETF is low cost fund that tracks NIFTY index. I invest in index fund to track the growth in Indian economy. My buy range is below PE17 which is historical average for last few years.


Summary is…

All stocks go on sale at some point in time. We need to exercise little patience, stalk them, and let our greatest wealth building asset work for us.

What companies are you stalking? At what price will you pull the trigger?

Disclosure: Long on LAKSHMIEFL and VISAKAIND at the time of this writing.









Facebook User Comments:


38 Responses to “Stalk your Kill before Going after It”

  1. vikrant says:

    Hi tip guy,

    What would be the price range for NIFTYBees below PE 17

  2. Young@Market says:

    Hi Tip,

    Nice to see ur write up after a long time…. Looks like you’s fair range for Guj Gas dropped a lot….. some of the stocks in under my analysis are Indraprastha gas, Mahindra Finance…

  3. Rabi says:

    Really very good article…
    can i have your opinion on stock like CANFIN HOMES LTD.(511196) & PANORAMIC UNIVERSAL LTD. (531816)

  4. Raja says:

    Guruji,

    Tempted to call you by that title because of the amount of learning that i have had from you in past one year or so. You are the first guy who has given me the confidence that a person interested to read, analyze, have patience… can be a good individual long term investor. Of course i knew of other ppl who have done similar things and appear on TV. But to me they always looked like being a different category of animal from a different plant and i could never aspire to be like them.

    Happy New Year, and welcome come back out of writers block :)

    One questions:
    1. Are you now fully allocated (in the context of your portfolio allocation) for the stock ‘Lakshmi Energy and Foods Limited’? I mean will you buy if it dips further ?
    2. Like you said, the waiting might take month’s, years… In the meanwhile will you buy price range move to reflect changing fundamentals ? I mean, how do you deal with this price range over a passage of time.

    Regards
    Raja

    • TIP Guy says:

      Hello Raja,

      Let’s leave title of Guruji for legendary investors. We are mortals trying to keep our capital safe. Writer’s block is driven by time block. Have not been able to spend much time on portfolio due to other good stuff going on in personal life. After about 9+ years, 2010 was first year that I missed reviewing my year end status. I am doing in now, even though it is one month late.

      (1) Regarding Lakshmi…Great question. Note, this is not a typical long term buy-n-hold dividend company for me. It is more of opportunity based on current valuations. I did double my position in it around 50s. I think I mentioned on FB. My maximum allocation to any given position is 5% of total equity allocation. After doubling, my position in LEAF is 2.8%. I am still well below my allocation so I may or may not add further.
      (2) I am with you on buying more in the context of changing fundamentals. Logically, one should be able to grasp the changes in fundamentals around the company and decide to take a loss, and move on. OR increase its stake. This is very subjective and one learns over time. I think this is good topic for a separate post.

      LEAF is a company in transition (very much like Praj) which is grappling with two issues (1a) excess inventory of non-basmati rice – driven by FCI’s low intake and ban of exports – can not do anything except sell in at low price in domestic market; (1b) management trying to diversify the company’s revenue base, going away from over-dependence on FCI; and (2) External factors i.e. food market macro scenario. This is actually very favorable for such companies and hence I think changes in LEAF’s focus is must. Will management be successful in diversification? That’s the risk you pay for!

      Having said that, I think another important factor is valuation. LEAF changed its financial year around 2008 (I think) and its result got skewed. The results were for 18 months. The valuation got skewed and went sky high in 200+. Which to me was just insane. Based on Greewald’s EPV/Assets I determined LEAF’s valuation to be around 105 to 130 depending upon the assumption of operating margins. And hence, I believe it is an opportunity based on current prices. Now the kind of transition management is undergoing, it is likely to happen in 2 or 3 years.

      Will I wait that long? In my opportunity based positions, I did not anticipate to wait that long. And that’s where it is a learning process for me. While I believe my fair valuation is correct, I still need to fine tune my expectations and buy range.

      There are other companies in same space, but I think their valuation was not that appealing.

      Best Wishes,

  5. kora says:

    couple the above list with insider buys , I haven’t seen heavy insider buying in others but in Praj Industries …

  6. Praveen says:

    I am waiting for Balkrishna Industries to come in range of 100-110. But not sure :)

  7. Anish says:

    You’ve mentioned Asian Paints at Rs626 to Rs.826. It is currently trading in the Rs2700 range. Is this a typo?

    • TIP Guy says:

      Hello Anish,

      It is not a typo!

      Best Wishes,

      • sunil says:

        Hi tipguy,

        With a minimum eps of 85 + and consistent free cash flows, this stock seem to be good (may not necessarily be at the current price). I would like dividend yield to be slightly better.

        Don’t you think it may never get to 826?

        Your thoughts would be appreciated here or to my email id.

        Thanks

  8. Yogesh Tiwari says:

    A while back, I happened to check my google reader, to see why it is wasnt getting any article from your blog, and realised that you took a nap :) . An article after a very long time, indeed…Keep it going.

    Excellent article, however, I differ on one point…why not initiate a small starter position when you spot a good business? What if earnings keep on increasing and dont let you buy and fair value range is never touched. As with earnings the range ‘d change, wouldnt it?

    I’d appreciate if you may quote an example from one of your investments..prior to 2008.

    Regards
    Yogesh Tiwari

  9. Chintan says:

    Hi,

    I’ve been following you for quite some while now. Great Stuff!!

    I’ve been chasing SJVN and Tata Steel(pulled the trigger at point blank range). I’ve been stalking Yes Bank and Bharti Airtel. Would go for the kill if they are drained of some energy(5-10% discount). Trying to find shortcomings of REC, NMDC, Jain Irrigation. I would also like to hunt down some elephants like SBI and HDFC. But for that I would need to team up(not with other tigers, but) with bears.

    Btw, I understand that you have a fair value range. But why do you have a price range for buying stocks?
    Wouldn’t you buy Blue Star below 175? Or that indicates a sale of a lifetime?

    • TIP Guy says:

      Hello Chintan,

      You have a good list of stocks to chase. Good Luck! SBI is on my list too.

      Buying below is always an option. It could be sale of lifetime or an indication of fundamentals have changed.

      Best wishes,

  10. saky1472 says:

    hii tip,
    Excellent post…Simply awesome… and written in a very entertaining way… waiting for your blog since long..I am new in investment world and learning a LOT from your blog.
    Thanx.

  11. Hi,

    Nice analogy.But for retail investors its really difficult to predict like you have done.And there is too much research available.What simple strategies one should follow so that he is not misled by the overloaded information.

    • TIP Guy says:

      Hi Jitendra,

      Well, I am sharing my journey. So I write as I go through it. I do not intend to or plan to propose/create any simple strategies.

      It is upto individuals to decide what is good for them.

      Best Wishes,

  12. chockalingam t says:

    sir,
    I am holding 200 Lakshmi energy @ 105. Could you please advise to average @ CMP of Rs.59?
    thanks

  13. Good article. Simple, easy and relevant as usual. Good to have you back TIPGuy. Companies like Asian Paints are special value picks since they are very transparent and governance oriented.

  14. Young@market says:

    Hi Tip,

    Have you ever got a chance to look at Indiabulls Financial services and IL & FS Investment Mangers (I liked the IL & FS business.. seems interesting to me.. have bit uneasiness over their real estate investments though)

    • TIP Guy says:

      Hello Young,

      No, I have not looked at them. Haven’t look at any services type of businesses (including IT/BPO/financial/etc) for a while. May be its time I should read about them.

      Best Wishes,

  15. idxchivalry says:

    Hello TIP GUY,
    u said that the price range for Lakshmi Energy and Foods Limited is Rs 63 to Rs 73 & u already bought it. current price is 24.10 INR.
    what ur next move? are u gonna increase ur portion investment on Lakshmi Energy?

    and for deviden i notice that Lakshmi Div yield only 0.87% don’t u think it is quite little?

    Best Regards

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