SpiceJet is up 55% from March, Indigo is up 62%. SpiceJet or Indigo?
These are difficult questions to answer. Nonetheless, my focus always remains on the leader. The second or the third players are smaller players. Their market cap is also lesser. Any quick money which would want to come in even for a trading pop will first look for the higher market cap, higher liquidity, bigger size stocks. Not to mention that they are bigger and also for the reason that their managements have been aggressive and they have put actions in plan well in time. That is why one may be positive or not positive on the sector. But if one has to look within the sector, the leaders are the ones to be looked at. So, my focus will be on the leader. In case of airlines, it should be Indigo.
Divi’s Labs has moved 84% Samvat to Samvat. Do you get apprehensive about the gains or do you just build up further investment?
I do not think you should apply too much mind to such good quality companies which are delivering. If there were some issues in the delivery for one or two quarters or even for a longer period of time, one could have doubt. The valuation has always remained a challenge not only for Divi’s but for any such high quality companies.
In fact, at this point of time, I do hold a small quantity of Divi’s for a long time and will continue to hold. That aside, let us also bring in the focus that as soon as the management has seen that the demand is likely to be there, they have announced the capex for further capacity to be set up.
The beauty is the way the controlled capital structure in which they manage their whole reinvestments and continue to remain net cash flow generating companies with high return ratios, excellent margins, almost consistent growth. Also impressive is the way they were able to manage quick USFDA approvals after their plants had been put on hold three years ago.
Valuation does remain a challenge but if you keep thinking of that, you can keep missing out. The only thing I suggest in these kind of stocks is if one doesn’t hold these stocks, then one should buy 25-50% of the targeted investment that they want to do in such quality stocks on the day they decide even if it is at a 52-week high, life high, even if it is at an expensive valuation. Another 50% one can probably try to get when there is a correction. So that is the strategy for those who do not have such quality stocks.
Coming to the second part, those who already hold such stocks and still continue to be conscious of valuation, I suggest they should keep booking profit in geometrical progression. So if they are holding say 100 shares, they should book 10% of the existing holding which means 90 shares, next three months, six months, one year down the line if they still want to book profit because the stock has again continued to go up. Valuation continues to remain 10% of the remaining holding. That means from 90 shares, one can sell nine shares and the holding will be 81 and then repeat the same exercise six months, one year down the line.
Hopefully you will never be out of such companies in life. The market cap is continuing to go up. So, for your remaining shareholding, you continue to reap money and at the same time, it continues to take care of the fear of overvaluation. Of course, it might so happen that in that whole process of geometric progression, the selling market may correct, stocks may correct and there may be one or two quarters of bad performance from the company. You might get an opportunity to add back to the holding at corrected stock price or at a corrected valuation. These are the two strategies that I can think of.
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November 10, 2020 at 01:50PM
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2 strategies to deal with valuation challenge in high quality companies - Economic Times
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