Will expensive Growth companies continue to outperform?

Mr. Kamal Manocha, Founder and CEO of PMS AIF WORLD held an engaging webinar in conversation with Mr. Amit Jeswani, Founder & Portfolio Manager, Stallion Asset to answer the question that whether expensive growth companies will continue to outperform in the market or not.

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Speaker Profile

Mr. Amit Jeswani is a Double Charter, has successfully completed his Chartered Financial Analyst (Virginia, USA) and Chartered Market Technician (New York, USA). He graduated in Business with finance from Kingston University London. He has been investing in capital markets from last 14 years. He started at a tender age of 16 as his father was a Stockbroker and has worked with various financial giants. He is an active member with the Association of Technical Market Analyst and Indian Association of Investment Professionals.

He is the founder of Stallion Asset & manages the Stallion Asset Core Fund, a multicap PMS.

Webinar Overview

The three factors in equity investing, namely valuations, growth in earnings and liquidity are crucial for all investors. At present, while valuations are attractive, and projected earnings are also good, liquidity is unfavourable, and that is why markets have seen prolonged correction over the last 8 months.

The important question now is, ‘Will expensive growth companies continue to outperform?’

This remains to be answered from a growth perspective.

There are several questions asked while starting an investment journey, but it is during the bear market that those questions turn out to be specific and decisive. ‘Are market valuations too high?’ and ‘When will the markets bottom out?’ are critical one’s that need to be answered. First time investors are at crossroads wondering whether it is the right time to invest in the market or one should wait for the markets to gain some upside direction.

Since the inception of Stallion Asset, the firm has seen multiple ups and downs. India, being clubbed in the fragile five during 2013 or the demonetization scheme that saw several hiccups and the latest being the pandemic. It leads to difficult situations for all participants alike, be it fund managers or investors themselves.

Mr. Amit Jeswani claims that there is always going to be a bull market, and the goal should be to be with it and not argue about the circumstances around it. Wealth creation will not take place without long term growth and if one does not stay invested for a long term, one should not expect Wealth to be generated in 2 years. Furthermore, problems will remain throughout the investment journey but also note that bull markets are part and parcel of it, just like bear markets.

The question that remains to be answered is when will the market bottom out? Mr. Amit Jeswani declared that, typically, greed is a smaller emotion than fear. History is ripe with evidence that a bottom is formed within 9-15 months once fear dominates the market. In the current scenario, a bottom may be formed by the end of this year, as per Stallion Asset’s research.

Yet again, it is nothing specific; it may happen, may not happen and equal chances of the fall spilling over to the next year. It took our economy 75 years to reach the $3 trillion mark and tentatively, only 3 years to double the mark in the future. Suffice to say, the kind of wealth that will be created in the next 8-10 years, has never been created in the last 75 years.

Businesses are scaling themselves like never before as the idea is to back entrepreneurs that will increase profits 10-15x from current levels. The completion of $1.8 trillion worth of transactions on UPI just shows that it is much bigger than PayPal or other global fintech counterparts in the arena.

The capable managements are the ones scaling up and rising to the occasion. Your capital will not compound at 18-25% without buying companies growing at a similar rate. Large opportunity size, new adjacent markets, market share growth, pricing growth and volume growth are some of the key tenants of growth.

A large opportunity size, sufficient volume and price growth combined with the market share growth are the ideal parameters that Stallion Asset looks for before investing in any business.

More money is lost buying bad businesses at cheap valuation than buying good businesses at steep valuations.

Stock prices are usually 40-60% cheaper for businesses growing at a rate of 20-30%.

Furthermore, Stallion Asset believes that market leaders in each sector are bound to receive 60-70% of industry profits over time. India’s leading consumer finance company comprises only 1.7% of the credit market, making it an ideal investment choice. They are bound to be the emerging monopolies with growth expectation of around 30-40%. The Stallion Way of investing has a focus on keeping the beta (risk) on the portfolio below 1.

It is noteworthy that consistent, scalable, predictable, and durable growth creates market capitalization whereas high ROIC protects the downside.

The asset management firm, Stallion Asset believes in investing in 4 sectors, namely- consumer, pharma, technology and financials. Similarly, a position taken in PB Fintech offered a huge opportunity as it has the largest marketshare for online insurance business in India. It is while answering questions like ‘How much to buy?’, ‘When to buy?’ and ‘When to sell?’  that the firm realised that they would have to exit the stock and enter at a later stage.

The returns from negatively related stocks do not meet the return expectations. Moreover, the trimmed portion is further invested in businesses that have fallen subsequently. It was eloquently put by Mr. Kamal Manocha, Founder and CEO, PMS AIF WORLD, that active portfolio management does require changes in views and strategies on frequent basis.

It leads to the question that whether upcoming sectors will be added by Stallion Asset as a firm. Mr. Amit Jeswani affirmed that as long as the sectors are not commodities and B2G, they will be changing their strategy for the same. Stallion Asset Core Fund’s portfolio comprises 80% of B2C and 20% of B2B companies.

The specialty chemicals sector has emerged as a new sector in the last 5 years where the conversion time of raw materials to finished goods is important. It has left a huge opportunity for all investors as it remains an emerging sector. Globally, chemicals have not profited similar to the one in India and it is important to track the performance of such businesses each quarter.

Earnings growth trend must be very long for stocks to feature in Stallion Asset’s portfolio. India’s growth story will lead to the GDP being doubled over the next 10 years (with a conservative approach), while the banking debt is 45% of the GDP. It will be a safer bet on the financials rather than entering a new sector.

The portfolio has moved from emerging monopolies to proven monopolies and has also removed small cap stocks. Expectations of a bear market led to such an action reducing the portfolio’s beta. During the period of 2009-14, Mr. Amit Jeswani was witness to earnings growth leading to an equivalent price growth on several companies. However, the speed of discounting in today’s world is unbelievable and hence leading to wealth creation in a short span of time.

It is important to move out when the crowd moves in around the start of the bull market, says Mr. Amit Jeswani

Giving us a peek into the future, Mr. Amit Jeswani exclaimed that Stallion will invest in growth for the coming decade. Proven monopolies and hyperscalers will always be a part of Stallion Asset’s portfolio in the future as well. It will be a safe bet where expected growth is 30% with an equivalent correction size. The speaker laments that value without growth is useless!

Stallion Asset’s aim is compound at a rate of 18-25% for the next 10 years where the capital is 5-9x for the customer. The speaker is sure that there will be 2 bear markets over the same period making it crucial to survive both. It is time for investors to be aggressive by taking cautious decisions ahead.

Reinvestment and buybacks are two important moats for any company, keeping the focus on growth.

Auto ancillaries are witnessing price action that has never been seen before whereas logistics has suddenly entered the arena with buoyancy. Price and growth action move hand in hand to create wealth for investors.

The first phase of a bear market helps us to identify the leaders of the next bull market.

The market views stocks differently and it is only when it adheres to your thesis that you stand to make money. Retail and building materials are two sectors where Stallion Asset has placed investors’ money. There are players where the ROE stands at 70-80% making it an ideal investment choice.

The insightful session was wrapped up by Mr. Amit Jeswani stating that they are poised to meet the management of a couple of automobile companies as the sector shows immense growth opportunity in terms of EV cars and regulations. It is important to track companies that have consolidated the sector over the last 4 years and invest in them.

It is the investor’s conviction, patience and perseverance that helps prevail in such difficult times. India’s growth story will continue to go strong in the near future leading to wealth creation in the next decade.

RISK DISCLAIMER: Investments are subject to market-related risks. This write up is meant for general information purposes and not to be construed as any recommendation or advice. The investor must make their own analysis and decision depending upon risk appetite. Only those investors who have an aptitude and attitude to risk should consider the space of Alternates (PMS & AIFs). Past Performance may or may not be sustained in the future and should not be used as a basis for comparison with other investments. Please read the disclosure documents carefully before investing. PMS & AIF products are market-linked and do not offer any guaranteed/assured returns. These are riskier investments, with a risk to principal amount as well. Thus, investors must make informed decisions. It is necessary to deep dive not only into the performance, but also into people, philosophy, portfolio, and price, before investing. We, at PMS AIF WORLD do such a detailed 5 P analysis.