We like companies which are:
- not over-leveraged,
- generate free cash flows,
- able to deploy capital at higher returns (in excess of 20%),
- regular dividend paying,
- command sizable market share and,
- most importantly are available at decent valuations.
Moreover, if we find Promoters/Management themselves buying the shares of the company through open market purcahse, it further bolsters our confidence and comes across as an icing on cake.
The good thing about such companies is their consistency and their ability to deliver market beating returns at all times. They also lend the much required stability to our portfolios during bad market conditions.
We are glad to share with you the details on our latest Alpha stock recommendation for the month of Nov’11, where we luckily could find all the above mentioned traits.
Some key highlights
- Promoters are buying aggressively at CMP. In the last one month itself they have increased their stake by more than 2%. This gives the much needed cushion to the downside.
- Over the last 7 years, the sales of the company have grown at a rate of 25% on annualized basis while the net profit of the company has grown at a rate of 35% on annualized basis.
- The operating business of the company is generating cash flows to the tune of one-fourth of its current market cap and the management has been able to deploy the capital very effectively with Return on Capital employed (ROCE) of 25% and cash flow ROCE of 27%.
- The free cash flow generating ability of the company has helped it pay off all its debt and is now sitting on a cash surplus equal to almost 30% of its current market cap. Considering the way they have been generating free cash flows, the cash surplus would exceed the current market cap of the company in next 24 months.
Given the consistency and trajectory of growth for the last 7-8 years, the above valuation does not capture expected future growth in earnings and rather making the business available almost free of cost.
We would suggest initial portfolio allocation of 3% at around CMP. We expect a decent return of 80%+ over the next 1 year and more.
Also we donâ€™t rule out a possibility of 10% correction, which could be market driven, though the same seems highly unlikely in the wake of the fact that everytime stock comes down to current levels, Promoters start buying aggressively. In that case, the stock would become cheaper and we may consider increasing the allocation to 5% (follow Alpha/Alpha + Weekly for subsequent updates).
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