06 – THE CYCLE IN PROFITS – Mastering The Market Cycle

Posted on February 9, 2020 by Jimit Zaveri under Bibliophile: Mastering The Market Cycle

As we have seen that the economy moves in a cyclical way and if the economy moves in a cycle then the industry will get affected by the cycle and due to that corporates also getting affected. The profitability of corporate earnings has been affected by the economic cycle. But such effects vary from company to company as per the inherent capability of the company.

Corporate profits rise and fall more compared to the GDP growth and we need to focus on factors that cause such cyclical trends.

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And when GDP shows weakness

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So corporate profits also getting affected by the economic cycle. We can argue that food, beverages, pharmaceuticals do not have any impact on the economic cycle. Yes, not high but during a recessionary environment, people tend to save more than what they earlier used to. People prefer to eat at home rather than to go out to a restaurant. People prefer to cut costs while experiencing a tough time.

Durable products majorly affected by the economic downturn because such goods can last longer and people can defer spending on such goods.

We should not have to directly consider that increases in the sales will similarly result in the increase in profits. This is because of the operating leverage. Cost mainly remains fixed and few costs increase with the sales.

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In general, it’s higher for companies for whom a larger percentage of costs are fixed and lower for the ones whose costs are more variable. Operating leverage helps the companies when the economy is in good shape and sales rising. But when the economy and sales are in bad shape, profits fall more than sales.

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Other than these, there are few other factors which can also affect the profitability of the companies such as management’s decisions regarding inventories, production levels, and capital investment; technological advancements (on the part of a company, its industry competitors); changes in regulation and taxation; and even developments exogenous to the industry or war, weather, etc.

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The technological disruption led cycle such as streaming has killed the DVDs culture so that those businesses which does not welcome technological changes, they all get out of the business. Nokia & Kodak are also the biggest examples of got the worst hit on business.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

Read for more detail: Mastering The Market Cycle: Getting the odds on your side by Mr.Howard Marks

The Intelligent Investor – 12 – Things to Consider About Per-Share Earnings

Posted on November 3, 2019 by Jimit Zaveri under Bibliophile: The Intelligent Investor

Many of the companies having smart enough management who know that analysts and the majority of investors focus on the bottom line so that they also emphasize the boosts earning at any means. Manipulating earnings for the few years can reward them a better way by offloading their stakes. Thus, we require to study earnings quality by putting a huge emphasis.

I have a different series under the “Simple is Better” category which covers tricks to identify earning manipulation.

Management of companies can be hungry for getting recognition which makes them involved in the playing with the earnings. We should not focus on the short-term earnings or one year earning for deciding for investment purpose otherwise we can be stuck into the trap. We need to focus on the footnotes for understanding properly for onetime earnings. Whether such earning will be going to recurring or one time? We also can perform an adjustment to the one time earning and need to check that still stock available at cheaper multiple or not. Does the company involve the frequent selling off assets for boosting profits? Does Company has change revenue recognition policy, change other accounting policy? Does the Company involve accounting shenanigans? When things available at dirt cheap then first need to check it thoroughly that why such cheapness is available with the stock. Cheapness is attractive always but the reason behind cheapness is an important factor.

One of the exchanges

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The company got other income due to stake sell into the subsidiary company which has boost earning by ~3x and due to such one-time earning P/E multiple has fallen drastically. And, this fallen P/E multiple misguide investors and attract them to make a mistake.

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We have to remove the effect of one time gain in the normal business and need to take an average of the 10 year or entire cycle for elements temporary and extreme profitability effects.

One of the automobile company has a reverse of the provision made during a slowdown time

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If businesses into the cyclical nature then it is advisable to take an average of past seven to ten years or a business cycle earning average for nullifying the effects of ups and downs into the earnings due to changes into the cycle. If we focus on the earning at the best cycle then we can attract to buy and end up with the losses or has to wait till the next good time of the cycle. Reversely, when we focus on the worst cycle then we avoid the opportunity and we end up with the opportunity miss.

Example of the cyclical company regarding buying at top of the cycle which resulted in losses and the bottom of the cycle resulted in a profit

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We are habituated to buy at the lower P/E and sell at the higher P/E but the same is not applicable in the cyclical industry. We have to buy company during the bad cycle which has depressed earnings that shows higher P/E and need to sell during the good cycle which has good earning that has depressed P/E. So, if we buy at the lower P/E then we end up with losses though P/E will be increased. Also, higher-earning is temporary and as the cycle turns out then earnings will disappear.

We can start reading an annual report from the backside so that some facts which the company wants to hide in the last section which comes first to us. Always read footnotes, focus more on learning about financial reporting.

Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

Read for more detail: The Intelligent Investor by Benjamin Graham, Jason Zweig

The Intelligent Investor 7 Portfolio Policy for the Enterprising Investor: The Positive Side

Posted on September 29, 2019 by Jimit Zaveri under Bibliophile: The Intelligent Investor

Enterprising investors are willing to put more attention and efforts for generating a higher return.

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Generally, an intelligent investor buys and keep holding common stock when it has a cheapness and they sell a common stock when it becomes overpriced. After selling off the stock they transfer to the bond and wait till another opportunity of common stock available with the cheapness.

General Market Policy—Formula Timing

This is an approach of investing timing of the market. The market keeps on fluctuating and taking a benefit of those fluctuations to our favor adds additional value. It is very difficult to forecast the future market level for a consistent period. When we look back towards any situation then it looks easier to predict but when we are passing through the situation then it is very difficult to predict.

Growth-Stock Approach

Growth stocks are the companies which have shown a growth better than an average. The problem with such kind of companies is they have given good growth into the past and we have to assume that they will keep on doing the same into the future. But such kind of stocks selection needs huge careful attention from the investors. As the bigger companies start to grow at a slower pace compared to the smaller companies. But it is also a fact that if the company is a leader with the availability of competitive advantage in the market then it has a huge probability of growth. We need to careful with what we are paying for buying a growth. If we pay a sky-high price for the prevailing growth then also, we have to suffer through the company grows.

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If we have proven wrong with our assumption of future growth and also, we have paid a higher amount for the business, then it will be a dangerously affect to our wealth. Growth stocks can create our fortune or can spoil our fortune. If our assumption for the future growth proven right and also, we have bought the stock at a proper valuation then fortune into the growth stock can be created. Many times, the company has a temporary problem, then it will be available at a relatively cheaper valuation. When larger companies have adversity, they have a resource and brainpower to come out from the adversity and market responds quickly to such improvement to the larger company.

One of the two-wheeler company of India

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The company which has a negative cash conversion cycle, availability of float, market leader since many decades, traded at 10%+ of earning yield with higher return ratio, market participants having a fear of electric vehicle disruption.

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One of the MNC FMCG company of India

Company’s one of the flagship product got banned which contributes decent revenue to the company. Also, no other competitor gets success in the same product at the same level. Company has a higher return ratio, good brand over the globe, successful track record.

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Mr. Graham mentioned regarding a cyclical business –

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We need to bought such businesses during the bad time at higher multiplier and need to sell it at a good time at a lower multiplier. During the bad time, the profitability of the company gets depressed which resulted in the higher multiple to the company and reversely, when time is good, profitability gets improvement which resulted in the lower multiple.

One of the sugar company

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When we want to get an above-average return into the investment, then our investment needs to be proper, sound enough to avoid risk and we need to adopt a policy which is different from most of the investors or speculators are using.

Bargain issues are those which are selling below its true worth. Now, for calculation of bargain – first, we need to forecast future earnings and giving it an appropriate multiple for arriving at a future market price. If the current market price seems lower than future market price then we can consider it as a bargain common stock. And second, where we need to focus more on the net realization of the asset value and net working capital (Working capital – all obligations) with the growth into the future earnings. Also, the current result is disappointing (future result can be improved) and unpopularity among the stock price creates a bargain opportunity. During a bear run, people do not focus on the companies which are not a leader, because they have a fear and belief that leader can provide safety. So that companies other than leaders will be available at a cheaper bargain price. We should focus that whether these companies can generate a fair return on invested capital or not and whether that generated return will be above the cost of capital or not. Such companies require a bull market, changes in policies, changes to the management, acquisition of smaller bargain companies by a larger one, etc. for reaching the fair valuation.

A special situation is also one of the ways to create a return on our investment. Special situations are different from the usual part of investing. Here, we need a different kind of process and different level of mentality compared to the usual one. This strategy includes demerger, merger, arbitrage, delisting, buyback, right issues, etc.

When we select to be an aggressive investor rather than a defensive investor then we require a thorough knowledge of businesses, how to value it etc. There is not a middle way between aggressive and defensive investment. And those who are involved in the middle way, they get a disappointment to the result due to the lack of requiring time and knowledge.

Disclosure – Companies mentioned in the article is just for an example & educational purpose. It is not a buy/sell/ hold recommendation.

Read for more detail: The Intelligent Investor by Benjamin Graham, Jason Zweig

YOU, ME & BUSINESS – ISSUE -1 – CEMENT

Posted on March 24, 2019 by Jimit Zaveri under You, Me and Business

I am going to explain about the cement, manufacturing process of cement, cost associated with cement, different types of cement, cement industry, consolidation to the cement industry and conclusion.

Kindly visit for detail on cement business —> YOU, ME & BUSINESS – ISSUE -1 – CEMENT