Hope you are doing good and enjoying the rally in small and mid-cap stocks.
Yes, after taking a good beating in 2018 and first half of 2019, the small and mid-cap stocks have started performing since late Aug’19. A lot of stocks are up 50-100% and the portfolios in general are up around 15-20%.
Despite the run up, the market is still throwing some very good investment opportunities as a lot of stocks are still down 40-50% from their highs and available at reasonable valuations.
Unless, you are from the group that justifies buying high quality low growth stocks at almost any valuation, you may find our latest stock report and the thesis behind the same interesting.
Just to be clear, we are only discussing the thesis because the stock report has been shared only recently with Premium Members and included in Model Sheet.
The company we are talking about has the following attributes:
- Market cap < 5,000 crore
- Largest in India with ~10% domestic market share and around 1% global share
- A rare high-quality company in its sector with good growth in sales – 18% + CAGR
- Growth in Profits – 25% + CAGR
- Avg. ROAE – More than 20%
- Lowest cost manufacturer in its industry
- Conservative yet growth-oriented promoters with more than 50% stake in the company
- Debt free balance sheet with Cash Equivalents to the tune of 40% of the market cap of the company
- Cash flows from operations – In line with reported PAT and negative in only 1 year in the last 8 years.
- Operating business available around 6.65 times our assumed stressed earnings (stressed earnings are lower than reported earnings), so the valuations look extremely good
- Expanding capacity by more than 50% through internal accruals
- New capacity to come on stream in 2021…pay-back period is around 4 years
You don’t always have to pay 60-70 times earnings to buy high quality stocks.
It takes some amount of hard work and one can surely find upcoming companies in small and mid-cap space that have all the signs of high-quality business, growing consistently and still available at reasonable valuations for one to generate more than decent returns in the long run.
Get access to Jan’20 and other reports and Model sheet by selecting Premium Membership