Ashish Chugh, the ace micro-cap stock picker, needs no introduction at all. He has discovered many hidden gems that have created enormous wealth for investors.
IFB Industries is one example that he presented to novice investors on the platter at the throwaway price of 69 Rs per stock. This is now trading at 1360 Rs—a whopping 2000% return in just three year. I really wonder only drug trade can offer more return than this!
Avanti Feeds is another illustrious example of this maverick stock picker that is up 5000% in the last 3 years.
What else can you expect then?
When it comes to picking stocks, it’s difficult to emulate his success. However, he has liberally revealed his investing secrets. These are so simple, yet so effective that you can’t learn them in MBA colleges.
And whatever research he does is available in the public domain. It’s believed that he just uses BSE website for all his research.
And I bet if you take care of these things, nobody can stop you from being a millionaire. Let’s know how he picks stocks:
1.Preference For Out Of Favor Stocks
Getting a stock at a cheap valuation (low P/E and P/BV) in the bull market is extremely difficult. Generally he looks for those stocks that are from either out of favor sectors or have been beaten down heavily due to some negative developments. These should be, however, curable negatives.
He gives an example of Balaji Amine, which was hammered badly . The reason was that it had adopted some expansion plan that was running behind schedule and it ventured into hotel industry.
Because of these two factors it suffered problem related to capital allocation. Most analysts wrote off the stock thinking that management is not able to deploy capital effectively.
That was wrong assumption. Ashish Chugh was of the view that if a plant expansion project is delayed, it’s bound to be completed one day for sure. So the problem is temporary in nature. So he decided to buy the company share at just 35 Rs.
Now Balaji Amine is trading at 700+ Rs—2000% returns in just 3 years!
There is a catch here. How will you decide whether it will not fall further since it can easily fall 30-50% from that level. We have already seen thin many stocks like GVK Power, Suzlon, JP Associates and in myriad of other cases as well..
This fear is perfectly justified.
This is where you need to take a judgmental call. The company was available at the value of just two years of cash-flow. Also, its existing business was generating a lot of revenue unlike GVK, Suzlon and JP Associates that lost mainly because of the huge level of debt and bad business model. There problems were of far more complex in nature.
2.Always Opt For Portfolio Approach
Microcap investing is a different art of stock picking. If you pick 10 microcap stocks in a portfolio, 2-3 stocks will virtually become zero. Remaining 4-5 stocks will give good returns. However, 2-3 stocks will give multiply 10-20 times.
However, when you are investing in an out of favor stock, you should ignore some quarterly numbers and negative events as you properly understand the reason behind the lagging performance.
Finding out a competent management is the trickiest part in the whole process of stock picking. One can’t decide with conviction whether promoters are ethical or not. Ashish offers a simple solution to this problem.
You should choose the company that has been able to grow over years without diluting their equity in the last 5 years at least. They should grow from Reserve and Surplus amount they have, which means company should grow with internally generated funds. There sales should go up, profits should go up, market caps should grow continuously.
Bad companies, however, often try to grow by exhausting Reserve and Surplus. Just see the balance sheet of Suzlon 5-6 years ago. They took excessive amount of debt so that their market cap grew but shareholders fund (Equity +Reserve and Surplus) was negative. No wonder for the kind of hammering the stock price witnessed. Another similar example is of JP Associates.
In addition, management should have skin in the game that means they should have high promoter’s stake.
Another positive signs are that if the management is increasing their stake from the open market buying, offering preferential warrants or doing a share buyback. During the last couple of years paper stocks rallied vigorously. However, the signs were clearly visible since promoters of many of the paper companies were buying from the open market. That was a sure shot sign of what was in the offing. Similar event was witnessed in the case of chemical stocks run up in the last few years.
And similar action is being seen in the steel cycle currently when promoters of many of the steel companies such as Prakash Industries, Jindal Steel and Power have offered preferential warrants or bought continuously from the open market.
These are common sense tips that may help you find the next multibagger stock. The purpose of this blog is to make you competent enough so that you can develop the capacity to analyze stocks yourself.