Annual Letter 2015-16

Annual Letter                                                                                                            

Year : 2015-16

Dear Partner,

2015-16 has been one of the most challenging years for us. The year started with a super confident note as Nifty had just hit an all-time high of 9200 or so in March 2015. Things changed soon. We saw huge volatility in index as we proceeded further. 2015 was marked by poor monsoon India, failure of government to push several key bills, oil price crash & china stock market bubble burst.

Below is our performance for the year,

*CAGR Since November 2009 ( inception ) : 37%

Performance is based on a model portfolio consisting of all active stock idea’s during the year. The portfolio has performed below our expectations.

• Strategy,
• Stock Performance
• Missed Opportunities & Lessons Learnt
• Model Portfolio

Strategy

We continued to focus on midcaps that are one of the leaders in their respective segment, are on the verge of a turnaround, and offer an attractive entry point. Unlike earlier years, we moved towards a more concentrated approach and preferred to spread capital in not more than 10 stocks. We will continue with the same approach going forward, with a firm belief that concentrated portfolios are ticket to wealth creation.

Most of the average ticket size investors are usually in wealth creation stage. For wealth creation we need a concentrated portfolio. Once you grow to a certain size after making good amount of money, then comes the wealth preservation stage. Being small investors, we can afford to remain concentrated and keep on making bets on mispriced midcaps, where gap between price & value offers attractive opportunity coupled with enough margin of safety.

We didn’t add new stocks during the year as there were 10-11 active stock ideas, and half of them traded at attractive levels to buy / accumulate. The idea was to focus on existing stocks, get rid of non-performers. Fortunately, we escaped January-February 2016 correction which saw many midcaps going through free fall. Our stocks did not move much as most were not into bubble territory & were pretty quick to rebound.

Stock Performance

We exited eleven stocks & added just one new stock during the year.

We used 2015-16 midcap boom to exit from most of our previous stocks, as we wanted to move towards creating a concentrated portfolio going forward.

Profitable Exits:

IFB Industries ( 480% ), Siyaram Silk ( 320% ), Honda Siel Power Products ( 230% ), Capital First ( 155% ), Everest Industries ( 85% ), Hinduja ventures ( 50% ) & Venkys ( 40% ).

Flat Exits:

Fortis Healthcare ( 15% ), Globus Spirts ( 4% )

Loss Making Exits:

Suzlon ( -45% ), ITHL ( -10% )

Suzlon, which we sold at -45% has been the worst stock idea we have ever generated. Much to the extent that we feel ashamed every time I’m reminded of this blunder.

Present Holdings:

We continue to hold 11 stocks at present. Out of these 11, we plan to exit from 4 stocks over the next couple of weeks. We look forward to add 2 to 3 new stock ideas during the year, possibly within next 3 months.

Wim Plast, KRBL, Take Solutions did exceptionally well & continued great run. We are not making fresh entries into these stocks, but continue to hold as we believe best is yet to come for these companies and present valuations suggest there could be further upside.

Mirza International performed well both in terms of stock price & business performance. However, its leather exports are flattening & we expect growth to slow down. We intend to exit the stock fully in weeks to come. Amrutanjan Healthcare had exceptional gains during 2014-15, and remained flattish throughout the year despite business improvement. The company shall continue to do well, but stock is fully valued and is discounting next 2-3 years’ growth well in advance. We plan to exit soon.

Out of remaining 6 stocks, our conviction in 4 stocks continues to go up. These companies are from agri, media / entertainment, health & engineering area’s and are on the verge of accelerating their performance. We are increasing our exposure / weightage to these stocks. Our confidence in others 2 stocks from retail & NBFC segment has gone down and will be followed with exits.

Missed Opportunities & Lessons Learnt

Though all main indices look flat or down for financial year 2015-16, there were quiet a few stocks in the midcap space which made exceptional gains. While most of the stocks we actively advised didn’t do much, almost everything on watch list gave spectacular results! Both in terms of business performance & stock price. Every investors journey is filled with regrets, and there is always could have, should have, would have scenarios. Errors of omission have costed us more than errors of commission. There is no point in saying I could have bought, or I should have sold this stock. All we can do is learn from the mistakes, digest & move on. Stay in the game long enough, keep moving ahead and eventually you come out as a winner.

1. Buying Too Early Doesn’t Work, Even If The Story Is Good :

We got into an NBFC stock well in advance.  The bet was on its ARC ( asset reconstruction company ) division. Company has gained leadership position in ARC, but it will take at least 3 to 5 years for supernormal gains to materialize, if any. We made the same error by buying an agriculture related stock 3 years back. Story looks promising now, and we are betting on it more than ever before. But as the entry was done 3 years ahead of time, a huge opportunity cost has been paid. We hope to not to repeat this mistake in the future.

2. Don’t Try to Shoot Moving Objects, Odds Of Success Are Rare :

It is thrilling to get hold on to company undergoing restructuring post crisis, and has the potential to go up 10x. We bought into a retail stock, considering its ambitious consolidation & steady growth plan. Things are moving really fast & each month there is some or the other announcement. Be it a new format launch, latest tie up, merger, acquisition, expansion into new stores & newer geographies, new loyalty program, ecommerce, analytics & what not.  Just too many things are happening, and it is difficult to work out the magnitude of each announcement. By the time previous announcement is analyzed, a new one comes in. There is just no clear cut path to profitability & cash generation.

It is really difficult to understand any business when management tries to do too many things at a time. Especially when the company is just coming out of crisis and trying to get back to profitability. If you take a look at top 10 businesses in any country, there is at least one organized retail company in the list. This particular company might become one of the largest retail businesses in India, but we will not get in unless there is an established model towards profitability. Exit is on the cards.

3. Sometimes It Is Important To Exit & Take Profits Early :

Quiet often stocks run faster than they should & start trading way above what they deserve. Investors tend to get carried away and continue to hold even after making good amount of money. All in the name of long term story which appears to be intact. Investors become biased & forget that trees do not grow to the sky. Everything that has had a spectacular run, will eventually revert towards its mean. This will happen either by way of stock price correction, or time wise correction where stock simply remains flat until earnings catch up with inflated values.

Having missed a mammoth run in La Opala, Bliss GVS, Cera Sanitaryware by selling out too early, we thought it is better to hold on to Amrutanjan Healthcare & Mirza International. The logic was, in bull market anything is possible, and valuations can go even further. What we failed to differentiate was, La Opala, Cera & Bliss GVS had long runways coupled with high growth rates, while Amrutanjan & Mirza’s growth was steady & incremental.

Model Portfolio

In order to add more clarity for our subscribers, we have started publishing a model portfolio from April 2016. Model portfolio shall consist all active stock recommendations at any point of time. All stocks are ranked as per preference & are given allocation accordingly. It can be viewed when logged into your Alpha Invesco subscriber account. We will keep you updated on this portfolio on a regular basis, as allocations change or ranking of a stock goes up or down.

Model portfolio will have allocations based on our conviction level, attractiveness of upside potential & downside protection. We have built in a simple questionnaire to help you to assess your risk appetite and build a portfolio that suits your risk profile i.e. High or Medium / Low.

Intent is to help our subscribers in creating & maintaining a portfolio. Seasoned investors have the ability to construct a portfolio on their own, they are able to spot favorite stocks & fix allocations. But significant number of investors who are relatively new or need assistance in capital allocation. They can follow this model portfolio as per instructions in the login section.

Model portfolio also helps subscribers / clients in measuring our performance based on a portfolio level & not on individual stock performance. Though we are into stock advisory services, we don’t want to be seen as a stock recommendation machine. Subscribers & clients should measure our performance on the basis of returns made invested capital & not on the number of stock recommendations.

In 2016, we entered 7^th year of operations at Alpha Invesco. We thank all our subscribers / clients for entrusting & supporting us. As we go ahead, we envisage Alpha Invesco to be a community of sensible investors, which interacts / networks with each other and adds value to every stakeholder in the process. In the coming years we ensure that our learning curve will be steeper than before & we will strive relentlessly to earn superior returns while keeping safety of capital as a primary goal.

Chetan Phalke

CIO – Alpha Invesco Research, April 2016

This is our first ever exercise to communicate via an annual letter. We will continue this practice for all the years to come. Annual letter is an effort to put our performance & learning in the public domain. We intend to maintain highest level of transparency in everything that we do at Alpha Invesco, as it helps to raise the bar internally. The journey has just begun.