What do we want to buy?
QiD (Quality in Downturn) – Small cap Blue-chip companies (high market share, RoCE & growth), which are temporarily going through a cyclical downturn in their business & whose stock price has been disproportionately hammered down by the markets.
We generally look for companies with the following characteristics:
- An average company, available at a deep discount or a superior business, available even at a moderate discount.
- Small companies with large market share, in niche sectors.
- Companies where, EV / EBITDA < 5 & EV / OCF < 10 where, EV= Enterprise Value, OCF = Operating Cash Flow , EBITDA= Earnings before Interest, Tax, Depreciation & Amortisation.
- Companies operating at low-capacity utilization with strong orders expected to ramp up in the near future.
- Strong promoter track record of delivery & smart capital allocation.
- Companies with a high dividend payout ratio.
- Business insulated from technological disruption.
- User of technology.
- Business with high value addition.
- Scope for earnings & multiple expansion.
- Companies with very low or negative EV due to cash, investments or surplus real estate.
- Track record of volume & unit realization growth without debt or equity dilution.
- Companies operating at low or negative Working Capital.
- Businesses running on customer advances.
- Businesses with low CAPEX requirements.
- Thinly traded counters with low volumes, signifying lack of investor interest.
- Companies doing regular share buybacks.
- Companies with change in management leading to improvement in efficiency and corporate governance.
- Unknown, unheard, unpopular, hated, hopeless, tainted (unfairly) companies.
- Prefer consumable business over capital goods.
- Businesses with strong terms of trade with customers & suppliers.
- Generally stay away from Financials, Real Estate, Gems & Jewellery & Technology.
- Generally avoid companies with fixed price contracts or annual price reduction contracts with customers.
- Generally avoid companies in tender business or where the company is unable to pass on increases in input prices to its customers.
- Generally avoid Project business.
- Generally avoid companies whose main customers are the government.
- We buy from pessimists and sell to optimists.
- We buy from retail investors & sell to institutional investors.
- Arbitrage opportunities.
We constantly strive to increase the quality & decrease the valuation of our portfolio, by switching our existing holdings with another stock offering either lower valuation & similar quality or similar valuation & higher quality.
We take P&L risk, we don’t take balance sheet risk.
When do we sell?
- If our initial investment hypothesis turns out to be inaccurate.
- If the stock price increases so that all future prospects of the company are adequately being reflected in the current price.
- If our investee company’s business fundamentals are deteriorating.
- Any slippage in corporate governance.
- If we find a better opportunity (superior quality business available at a discount to our current holding).