Chirag Joshi, Author at StockBasket Blog

Educating Investors

Portfolio Approach v/s Stock Specific Approach

By Chirag Joshi June 8, 2020

Picking the right businesses to invest has also been a difficult task. There are many techniques and approaches to investment. Therefore, it gets somewhat confusing to select and follow a strategy. Questions like going all bounty for a stock or creating a portfolio of stocks, going for a penny stock or a well-established market leader, are always around the corner.

Did you know the difference between buying a stock and creating a portfolio?

Investing in a stock should be after having a complete understanding of the business of the Company. In-depth research and analysis of a company help the investor decide whether a particular stock could outperform the market return. The study consists of many things, including but not limited to, company’s viability, future profitability, scalability and sustainability in the dynamic environment. This type of approach where we first identify a particular company and analyse it entirely is known as a Bottom-up approach. Investors willing to invest in a specific stock prefer a bottom-up approach.

Unlike when the investor wishes to create a portfolio of multiple stocks, one may choose various businesses in diverse sectors which are less correlated to each other. Correlation is significant between the shares to minimise the overall portfolio risk. This type of approach is also known as the top-down approach. The investor would start by analysing the macro-economic indicators, identifying benefiting sectors and then identifying market leaders in those sectors.

Which approach is better – Stock specific or portfolio?

The stock-specific approach is preferable for active portfolio managers who understand the exposure to risks and allocation of capital. The stock-specific method generally has higher variability in terms of average returns. It tends to outperform the portfolio of stocks, i.e. higher returns than returns from a portfolio of stocks since the risk is also high. For passive investors and newbies, the portfolio approach should be preferred as it reduces the overall risk and allows the investor to stay in the game for a little longer. Here are the benefits of a portfolio approach to investing.

Diversification – Diversification is a hedging tool which evens out losses from specific sectors with profitable ones and vice-versa. Hedging comes at a cost.
Lower but Sustainable returns: The overall performance of the portfolio reduces when compared with a non-diversified portfolio or few selective stocks because of the diversification. As against this, the stock-specific approach has a more significant risk as a large percentage of the capital is employed in a single stock. Any underperformance of a particular stock has a substantial impact on the portfolio return. Further, a share is affected by the short-term fluctuations in the market, which may or may not equal to an investor’s potential losses. Portfolio approach offers stability in the returns.
Long term Investing- Portfolio approach is all about having a long term outlook. It creates wealth over the years with consistent compounding of returns. A stock-specific approach may or may not have a longer outlook as the fundamentals of the business change and may not be very relevant considering the market dynamics.
Lower Risk- A direct benefit of diversification is to reduce the overall portfolio risk. This happens because of the elimination of idiosyncratic risks or diversifiable risks or unsystematic risk. Unsystematic risk is the inherent risk specific to the Company or a particular industry. Such stock-specific risk drastically reduced through diversification by investing in a range of companies and industries. A portfolio is immune to this as it is well diversified.
Compliments your financial goals- A portfolio compliments your financial goals such as early Retirement, Child Education etc. as it consists of all the stocks from different sectors. While a stock-specific approach would not help as a stock or industry may become obsolete until the time you reach your goal deadline. For, eg. The fuel industry may die after the introduction of electric-powered vehicles in the near 20 years.

‘The only certain thing today is uncertainty’. The business environment is dynamic, and the market dynamics are shifting gears constantly and hence, requires constant monitoring and action to manage the overall portfolio risk. Creating a diversified, long term portfolio may prove to be a better tool in this business environment over a single stock. StockBasket offers one such opportunity of portfolio of stocks analysed and selected by an experienced research team. StockBasket offers a readily available portfolio with minimum overall portfolio risk as well as aligned with the long term aspirational goals of the investor.

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Educating Investors

Power of Diversification

By Chirag Joshi June 8, 2020

Ever heard of the phrase “Don’t put all your eggs in one basket”? This phrase is widely used in the Investment world. But what does it mean?

Diversification is a portfolio risk management strategy to reduce the overall risk of the investments which mixes a wide variety of investments within a portfolio.

Let’s say, Mr A is a businessman who owns a well-reputed Umbrella manufacturing firm. The company records a massive increase in sales in the September quarter and significantly low sales in other quarters every year. This is due to the high demand of the product in the rainy season and extremely low in others. This got Mr A to start manufacturing boots. So, here, he diversified its business for sustainable and consistent growth. Expanding into other business segments have been very common in the past and here are some examples of successful conglomerates;

ITC-Indian Tobacco Company was a cigarette manufacturing company which has diversified into segments of FMCG, Hotels, Paperboards & Specialty Papers, Packaging, Agri-Business and Information Technology.
Reliance Industries – It started as a textile company spreading its arm into oil and petroleum refining company, energy, natural resources, telecommunication and retail sectors. This is called as cross-sectoral diversification where different segments may or may not have benefits of synergies.
HUL- Hindustan Unilever Limited is a multinational FMCG company dealing in consumer durables, personal care products, cleaning agents, water purifiers etc. This is a typical case of intra-sector diversification, where the company has a wide array of brands within a specific product offered to a different class of consumers.
Aditya Birla Group – It is an Indian Multinational Conglomerate which has various subsidiaries and joint ventures around the globe in Cement, Fashion, Textiles, Metals, wealth management etc.
Tata Sons – Tata Group, is a century-old family-driven organisation venturing into Information technology, automobiles, metals, power and energy, chemicals, electronics, consumer products etc. to name a few. Further, the Tata group of companies have geographically diversified with their presence across the globe.

These companies had started their journey in one sector and then spread their wings to more areas as part of their expansion as well as a diversification strategy.

Can we apply a similar concept to our investment portfolio as well?

Well yes, different asset classes in a single portfolio help to hedge the potential losses from the asset class/stocks.

Portfolio Diversification can be achieved in the following ways –

Asset diversification: It can be achieved by a strategic asset allocation in equity shares, bonds and Debentures, ETFs, Commodities. Currencies.
Sectoral diversification: It is the diversification of funds in different types of sectors like Banking/Finance, Technology, Energy, Automotives and auto ancillaries, Telecom, Metals and Mining, Pharmaceutical etc. StockBasket offers a portfolio of expert-curated baskets of stocks from various sectors in the right proportion which minimizes the overall portfolio risk as well as aligns the long term aspirational goals of the investor.
Geographical diversification: It can be achieved by having exposure to assets of foreign countries. In India, individuals can invest in the US S&P 500 with the help of a mutual fund, thereby giving them a geographically diversified portfolio.

The three main advantages of diversification are risk mitigation, preserving the capital and lesser dependence on a single investment, thus improving overall return.

Diversification is nothing but a hedging tool, and hedging always comes up with a cost. Diversification evens out loss from specific sectors with profitable ones and vice-versa. Therefore, the overall return of the portfolio reduces when compared with a non-diversified portfolio. Therefore, many retail investors might find it difficult to replicate a well-diversified portfolio due to limitation of resources like capital, time, research and access to information.

Buying units of a mutual fund offers an inexpensive way to diversify investments.

The business environment is dynamic and hence, requires constant monitoring to minimise the overall risk of the portfolio. Diversification is a far better tool to reduce the overall risk of the portfolio.

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Investment Philosophies

India’s top 10 Value Businesses

By Chirag Joshi May 30, 2020

India is considered to be one of the fastest-growing developing economies of the world providing favourable business environment i.e. ease of doing business, abundant resources, good infrastructure and plenty of growth opportunities. Many multinational companies have started their operations in the past seeing the mouthful of opportunities and expansion potential too. The companies that have capitalised on these opportunities turned out to be market leaders. Being market leaders, they have shown consistent growth, dynamic management, consumer satisfaction, higher yield to investors, taxes to the government. In short, they have contributed to all its stakeholders in their growth story. In this article, we are highlighting the ten companies that have outperformed their peers in the past and shall continue to do in the future as well, capturing further market share.

Colgate Palmolive India Ltd. – It is a leader in providing oral care products such as toothpast , toothbrushes, mouthwash under the brand name of ‘Colgate. Being established in 1937 in India, it has one of the widest spread distribution network channels in India and is available in almost 6.1 million retail market outlets.

A debt-freee company in the FMCG sector with promoter holding of more than 50 percent, outperforming its sector index since 20 years having a CAGR of close to 13% and a dividend yield of close to 2%should always be on the cards.

HCL Technology Ltd. – It is an Indian multinational IT service and consulting company and a subsidiary of HCL enterprise. With a staff strength of more than 150,000 employees, it operates in many sectors including but not limited to healthcare, defence, retail, travel, utilities and technology. Founded in 1976, it has grown to a market cap of more than INR 1,40,000 crores and a return of equity of more than 22%. The promoter holding is more than 60 %and P/E at only 12, making it a valuable bet in the technology space.

Hero Motocorp Ltd. – Founded in 1984, it has been designing and developing two-wheeler vehicles for customers around the world. It is a dominant market leader in two-wheeler market with over 50% market share in the domestic motorcycle market. It is effectively zero debt company with a P/E ratio of close to 10, lowest in the sector it operates. The company has been yielding good returns to the investors, being a market leader.

Hexaware Technologies – It is one of the fastest-growing companies with over 190,000 employees. Founded in 1992, an Indian Multinational company, is a debt-free company, has an earnings yield of over 13% year on year. It also has a dividend yield of 3.61%. With a forward-looking technology company, Hexaware Technologies is surely a company to look for years to come.

Dr Lal Pathlabs Ltd. – Debt-free company in the Pharma space is hard to find. Founded in 1949, it provides all ranges of blood tests and routine tests and has more than 3,900 employees. The company has been the biggest beneficiary during the current health crisis and has leveraged its resources optimally. The company has outperformed the S&P BSE Healthcare index consistently over the last 5 years and has been on an increasing trend. With a more than 50 percent promoter holding, Dr. Lal Pathlabs can be an outperformer in the pharma space in the years to come.

ICICI Prudential Life Insurance– A life insurance company incorporated with a joint venture between ICICI bank limited and Prudential corporation Holdings limited. In 2017, it became the first insurance company in India to be listed on NSE and BSE. India has an underpenetrated insurance market giving huge potential to the companies in the Insurance sector. Being in the business for the last 20 years, it has become a market leader outperforming the S&P BSE Finance index consistently over the last 5 years.

Titan Company Ltd. – It is the largest consumer company of the TATA Group, incorporated in the year 1984 as a joint venture. It manufactures fashion accessories such as watches, jewellery, belts and eyewear. Backed by strong management having high ethical and business values, the stock has risen from a share price of INR 3 to current market price of close to INR 1,000 per share in the last 20 years giving multibagger returns to the investors, consistently outperforming the benchmark index by a huge margin.

HDFC Asset Management Company – Incorporated in the year 1999, it is one of India’s largest profitable mutual fund managers with INR 3.2 trillion in assets under management and a customer base of 9.4 million live accounts. The stock has already doubled the investor’s wealth in less than 2 years from the date of listing on the stock exchange. Mutual fund investments has been an uncharted territory for most part of India’s population and therefore, providing a huge opportunity for the asset management companies. HDFC AMC, being a market leader, backed by the most prestigious promoter bank, gives immense confidence to the investors. It is a portfolio stock and should be added at all levels. Insurance and securities are the two non-lending financial businesses to look out for the years to come.

Bajaj Consumer Care Ltd. – It is the leading company in hair care and skin care products. If you are looking for some annual fixed income, Bajaj consumer Care ltd. is the stock. It has a dividend yield of more than 10 percent. The growth rate in terms of CAGR exceeds the industry growth rate consistently year on year. The business dates back to the year 1953 and is the second largest company in the Bajaj group. The FIIs and DIIs combined hold more than 45 percent of the company, sensing a great amount of confidence in the business potential of the company.

Procter & Gamble Hygiene & Health Care Ltd. – With more than 80 percent of the shares held by the promoters, FIIs and DIIs, the company has a market leader in the FMCG sector. This multinational has increased from INR 300 per share to a whooping INR 10,500 per share in a span of 20 years only proving to be multi-bagger at a CAGR of 16 percent.

Most common trends of these companies in order to become market leader includes identifying strengths and opportunities, dynamic decision making, growing and satisfying customer base, adapting to changing market conditions and identifying a good combination of resources and capabilities. A constant SWOT analysis and leveraging its existing capabilities to newer functions and products has led to the success of this company. All the companies are backed by strong promoter holding and goodwill backed management.

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Educating Investors

7 things that you should consider before picking a stock

By Chirag Joshi May 30, 2020

Every correction creates a long term opportunity to choose businesses. However, there are a number of criteria to be applied before finally investing in a stock. Above that, there are more than 5000 stocks listed on the stock exchange making it even more difficult for retail investors with limited resources to screen the best out of the lot. There would be many stocks ticking a few matrices but only a few businesses ticking most of the filters.

Should you go for market leaders or companies with a turnaround plan or small businesses with huge potential or businesses with a promising leader?

As a long term investor, one should look for promising and futuristic businesses i.e. management should be forward-looking, consistent in a year on year growth and dynamic in their decision-making process.

Buying any stock is very similar to buying any consumer product, let’s say, a mobile phone. Just as you would research, understand and compare the features, benefits and specifications of a mobile phone with its peers in the same price range before actually buying it, every investor should always research the company, understand it’s business and its competitor’s scalability before actually investing in it.

One must always remember stock is a share of the ownership of a company. So when you invest in a certain company you own a part of it.

Basic homework before investing in a company.

Analyse the Industry: Understanding the industry the company operates in, gives the broader picture of where the company is headed. An industry growth rate will enable the growth for each of the companies in the industry depending on their respective market share. A company can be a market leader yet underperform if the overall industry has a slumbered growth. This would be the first step of the analysis where top focused industries with high forecasted growth rate are identified. One can study the government investment plans and its focus to develop a particular industry. This would enable the investor to understand whether the industry would remain lucrative in the near future or not.
Selecting the stock : Once the lucrative industry has been identified, the next step would be identifying the most promising company within that industry. Going with market leaders help to minimize the risk exposure to a particular sector. Market leaders tend to leave the industry late in a recessionary period and capture the market share earlier once the economy revives. This is possible because of the availability of resources and skills to monetize and capitalise on the available opportunity.
Understand the business of the company: Since investing shares in the company would mean proportionate ownership, it is imperative to understand the business in and out. It would include the business model, scalability of the products, company’s USP, how they generate profits, its competitors etc. A very simple SWOT analysis should be enough to make a preliminary inference about the company.
Competitors: The company’s market share in the industry will empower to capture opportunities earlier and faster than its competition. One needs to understand the key points where the company is better or worse than its competition and accordingly, value the company. The exclusivity and scalability of the product / service of the company will support the company to be market leader for a longer period of time.
Company’s Management: Investing in a company without knowing its management is like giving money to a stranger and expecting something in return. A good management can be identified by reading a firm’s management statement and management commentary where the top management shares their view on the company‘s past performances and future prospects. A good management driven company will always have better prospects to grow and sustain for a longer period of time. Another reason why knowing the management of the company is important is because they would be running the day to day operations as well as take strategic decisions for the company. Owners usually don’t have a say in here since ownership and management are different in case of a corporate structure.
Analyse Financial Statements: Financial Statements of a company consists of a Balance sheet (reflecting the position of the company), Income statement (reflecting the performance of the company) and Cash flow statement (reflecting the cash position and liquidity of the company). These statements need to be studied, understood and compared period on period to make a right investing decision.
Analyse Financial Ratios: This helps an investor to compare a company’s performance with its peers in different aspects. The key aspects could be profitability, liquidity, solvency, valuations and operating ratios.

The most commonly used indicators are valuation ratios and profitability ratios. The former contains ratios such as price/earnings while the latter has return on capital employed (ROCE) and return on equity (ROE). One should always keep in mind that a selected stock should have high profitability and low valuations as compared to its peers.

These basic steps should be followed by every investor along with in-depth analysis specific to the industry and type of business. This practice of evaluating stocks is known as Fundamental analysis – Top down approach.

We have screened, analysed and cherry-picked the following stocks which are present in our StockBasket as well.

Hindustan Unilever
Tata Consultancy Services
CRISIL
Bajaj Finance
HDFC Bank
ITC
Godrej Consumer Products
Jubilant Foodworks Limited
Infosys
National Institute of Information Technology

These are the top ten growing Companies as well as the market leaders in their respective sectors backed with good management, strong financials and amazing track record.

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