EquityMidas

Subscriber Update - Aug '21

Dear Subscriber, Welcome to the first issue of Equity Midas Capital’s Subscriber Update. 

At the outset, let me say that I am extremely humbled by the response Equity Midas received in its first year of operations. Thank you! 

With all the companies having released their first quarter results, this is an opportune time to review the performance of model portfolio and the operational performance of the constituent companies.  Thru these letters, we envisage to communicate more than just performance reviews and use this platform to share our views and future plans as well.

We plan publish these letters every 3 months, in the first week of September, December, March and June.  This also allows us to collate & analyse the results published for the previous quarter and include the same here. This may change based on the feedback.



Typically our letters will include:


1. Portfolio Performance Review
2. Company Operating Performance Analysis (as against EVM defined expectations)
3. Response to questions/queries raised by you (and some which you did not raise) all during the last 3 months
4. Updates about new products/ideas/improvements (What’s Cooking?)
5. Views on any (hot) topic concerning equity markets and/or work in progress ideas (Chef’s Corner)

Portfolio Performance

Equity Midas opened for subscription in March 2021 for the 2021-22 portfolios. We published our first recommendations (April tranche) for 5 companies and by the end of the cycle, we had recommended 34 companies across three tranches (April, May & June) in the Feast portfolio. It was an extended cycle mostly due to delayed results declarations by listed companies (as allowed by SEBI due to the covid situation). As on 31st August 2021, average holding period of our recommendations has been 3 months. 


This year the number of stocks shortlisted by EVM exceeded 30. Historically, whenever we have been in this situation i.e. higher number of stocks being shortlisted, the returns have exceeded the average returns of EVM portfolio (per back testing).


EVM recommendations were published when the markets were extremely over-valued on all traditional parameters. Markets had almost doubled in the past 15 months! The contradiction was evident, on one side we had (and have) over-heated markets and on the other hand we have companies performing much better than expectations. Fortunately, under these circumstances, both the markets and the EVM portfolios have performed well thus-far.


Unrealised Returns, As On August 31 2021 (before fees & taxes)
PORTFOLIONUMBER OF STOCKSCAPITAL RETURNS (%)DIVIDEND RETURNS (%)TOTAL RETURNS (%)BENCHMARKBENCHMARK RETURNS (%)
FOCUS (LARGE & MID CAP)923.420.3223.74NIFTY 20010.61
FEAST (ALL CAP)3413.290.4913.78NIFTY 50010.54

Key Observations

  • The model portfolio shows a strong bias towards industrials, cements, metals & chemical companies. In turn the bet is on companies & governments spending more on Capex. You will see this kind of pattern every year. For e.g. last year the bet was on pharma and chemicals.
  • Focus portfolio has performed better than Feast. This signifies that the large & mid caps have performed much better than small caps in the portfolio.
  • When the small caps corrected (from Aug 4th onwards), Feast portfolio saw a knee jerk fall but stabilised as we approached the month end.
  • EVM Feast, predictably has been more volatile due to its small and micro cap components.
  • Returns by tranches:
    April Tranche – 23.18%
    May Tranche – 24.63%
    June Tranche – (6.01%)
  • Overall the model portfolio performance trend is in-line with the market performance. 
  • FEAST portfolio has out-performed its benchmark by 3%.
  • FOCUS portfolio has out-performed its benchmark by 13%.

Operating Performance Analysis - EVM View

With last year’s Q1 being washed out due to the pandemic induced lockdown and very similar situation this year as well, both YoY and QoQ performance comparison made little sense this quarter. Either ways, EVM does not really analyze either of (YoY or QoQ) performance. What EVM is interested in is whether the company is on track to meet its expected performance.

The table below gives you how the companies have performed  against the EVM expectations. “EXPECTATIONS ACHIEVED” column indicates what percentage of annual operating performance expectations achieved by the company in its first quarter. In any typical year, EVM classifies companies delivering at least 20% of expected annual operating performances in the quarter as acceptable. This year though, considering the lockdown situation, anything above 15% is an acceptable performance.

If we group the companies based on whether they were not able to achieve the 15% of expected annual performance in Q1, this is what we see:
GROUPNUMBER OF COMPANIESEXPECTATIONS ACHIEVEDRETURNS AS ON 31-AUG
Group I95.68%2.33%
Group II2525.10%17.80%
Group I which did not meet the expectations has delivered lower (2.3%) returns and 5 out of 9 companies have yielded negative returns. This next group of companies were able to achieve the 15% of expected annual performance in Q1 and hence did meet the expectations. This group has generated vey good returns (17.8%) with only 3 out of 25 companies yielding negative returns.

Thus the group meeting or beating the expectations has delivered much higher returns. This outcome is in-line with the model back-test. Individually you may find a few stocks that defy this correlation, but as a group, the returns seem to follow the EVM tenet.

Note: The market is discounting the pandemic situation. But, where there should have been no impact due to pandemic and yet the company has faltered, the market has hammered such stocks.

Investor Queries

Q1. Have you factored in the kind of drop we saw in our FEAST portfolio value in August when the Nifty and Sensex were doing so well in your model? Was it a reflection of the quality of the model portfolio?

Ans: No. The portfolio quality is not a suspect here. The stock selection quantitative technique used, is the same one that we have back tested on at least 15 years of data. All stocks in the model portfolio are validated for their financial strength.

This year the weightage of small and micro cap stocks in the FEAST portfolio is higher in our portfolio (25 out of 34). This is due to the fact that all of them have shown very good operating performance in the past year and more importantly the market also acknowledged those performances. These stocks that we shortlist are cheap on traditional valuation parameters but have excellent financial strength. Being smaller companies, their market values fluctuate a lot and since our portfolio is focused on certain sectors, when it corrects the impact is magnified. It is true in reverse as well. We benefitted due to this from May to August beginning.

When we have small and micro caps in the portfolio, we understand that such situations will occur. However unnerving these drops may be, we recommend holding on till we complete 1 full year.

For investors who do not like fluctuations, more suitable portfolio is FOCUS which only includes large & mid cap stocks. In short, the portfolio is sound. The fluctuations hat we witnessed in August are part and parcel of investing in small caps.

Q2. When such a drop happens, should we invest more capital?

Ans: Adding or exiting any financial product should be a function of risk management and not their market values. Once you have committed a certain capital to investing using EVM recommendations, you knowingly or unknowingly did that based on your risk appetite. Unless you (or your investment advisor) re-evaluates the risks and takes a informed call, market value drop should not generate additional investing in any product.

There are certain financial products like SIPs where we invest irrespective of the market situation at a pre-planned time with a pre-planned amount. EVM investments can be considered as your SIP, albeit an yearly one.

Always avoid the situation where you are over-exposed to a certain product. There is no law that states that stocks which fall have to reverse.

Now coming to EVM, our portfolio includes over 30 stocks to which reduces risk of over-exposure to any one stocks. If you buy when the market falls, you will be able to buy only some of the stocks – not all 30. This means that now weightage of different stocks is not uniform. Our quantitative model assigns same weightage to all stocks, by this additional tranche of investment, that weightage uniformity will be broken. It can be more beneficial but it can also be more risky. After all, what if the stocks that have dropped in price do not recover? So be careful in case you choose to invest more. Do it after sufficient due-diligence.

What's Cooking?

New Portfolio Offerings

EVM as a concept was thought of when I was driving from Wayanad to Bekal. The concept that performance, expectations and rewards are closely inter-related (as I observed in year end appraisal process during my IT stint), seemed very aptly applicable to the stock markets. The journey from that concept to a developed and tested model was a lengthy one. This is where most of the efforts are spent not just on developing the model but also on testing across market conditions. 

With the EVM concept validated, we are now working on using the same to develop & test more portfolio offerings:

  1. Quarterly EVM (Q-EVM) – EVM that runs on quarterly basis.
  2. EVM for Nifty 50 Stocks (Strength of Nifty, SON)
  3. EVM for Strongest Sector (Sector Of The Year, SOTY)
  4. EVM for US listed stocks

EVM for Nifty 50 stocks will be an great alternative to NIFTY EFTs or Index funds. Q-QEVM will allow taking shorter term bets for investors. SOTY will be a focused bet on hot sectors for that year or quarter. If it works for Indian stocks, why would it not work fir US stocks? We hope to answer this before Feb 2022.

Once developed these will be offered on the SmallCase or similar aggregator platforms.

Ranking of Stocks

One key ingredient that can make the current model even more powerful is its ability to rank the stocks. Currently we recommend all stocks short-listed by EVM with the same conviction and hence the same capital allocation. Since the exact number of recommendations cannot be guessed before-hand, the capital allocation needs to be flexible. Ranking will enable us to recommend an exact number of stocks every year to ease the investing process and yet yeild similar returns.

Ranking is also very important to generate portfolios like SON and SOTY. As on date, our ranking algorithm is being tested. I have had some success and I continue to test. Any ideas are welcome!

 

Chef's Corner - The Dream Portfolio

Valuation (as sum of future cash flows discounted at expected returns) is the foundation of stock selection for many successful investors. Unfortunately, it is very difficult to get it right in practice.

I see value (and valuation) as the ability of the stock to generate required returns in expected time frame. 

According to me, stocks generate positive returns under only two circumstances:

  1. They out-perform the expectations (or show signs that they will)
  2. There is more demand than there is supply
EVM is built around the first point. Demand analysis is the basis of technical analysis and is usually based on indicators and patterns. But, I am convinced that there can be a better way to analyse “demand”. A combination of both of these will probably be able to generate a dream portfolio. Hopefully this will be Equity Midas Capital’s new product offering very soon.
 
 
Thank you & Regards,
Ashish Arole
EquityMidas.com

 

 
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EVM Guidelines for Operating Performance Classification

EVM states that the market performance of any stock is closely correlated to the underlying company’s expected operating performance. Every quarter we analyse the operating performance of the recommended stocks against the expectations calculated by EVM.

 

We rank the recommendations based on the operating performance and group them in 4 quadrants based on expectations achieved in that quarter. Here is how we group them:

 

 

[gdoc key = “https://docs.google.com/spreadsheets/d/10Q9md31DDXq-0QFW5QZ-prVy6wJmc86GWe5ch-Qj48Q/edit?#gid=972865918″ use_cache=no class=”no-datatables” query=”select O,P,Q,R,S limit 5″ csv_headers=1 header_rows=1]

According to EVM, the group meeting the expectations for that quarter should deliver better than market returns.

 

 

 

 

 

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You agree that the services provided is only in the form of recommendations on the potential investment opportunities and we are not responsible for any losses that may be caused on the investment decisions taken based on our recommendations. We would recommend you to segregate your capital and investments into multiple products (time deposits, corporate bonds and equity). Investment of entire capital into equity stocks is absolutely not recommended. You would not bring any claim to EquityMidas, and/ or its group entities, or any officers, employees or our agents in respect of any or all losses, direct or indirect damages, claims, proceedings, cost and expenses suffered by you or any one for the decisions undertaken based on our recommendations. You are recommended to independently evaluate whether to make an investment or not. We would not be responsible for any losses that are caused on account of investment decisions taken by you which do not match your risk profile.

What is EVM?

EVM or Expectations Value Model is an innovative proprietary approach to stock market investing.

It is a quantitative model to determine market expectations from a company and the probability & viability of the company being able to meet those expectations. Stocks meeting the viability and other quality criteria are shortlisted. Further the comapnies are verified for their financial strength before being added to the portfolio for that year.

This process is run yearly once the annual results are published.

Detailed Operating Performance Analysis

Group II constituents are listed below.  Metal stocks are under pressure currently and hence the impact on Sandur, Tata Metaliks and LA TIM.
Sr. No.COMPANYEXPECTATIONS ACHIEVEDRETURNS AS ON 31-AUG
1Thangamayil Jewellery Ltd.-1.5%25.0%
2Nucleus Software Exports Ltd.-1.0%-20.0%
3The Grob Tea Company Ltd.0.9%-22.0%
4High Energy Batteries (India) Ltd.5.2%84.0%
5Kanchi Karpooram Ltd.7.4%-15.0%
6Auro Laboratories Ltd.8.4%-19.0%
7Refex Industries Ltd.8.6%2.0%
8Mangalam Organics Ltd.10.3%-16.0%
9Associated Alcohols & Breweries Ltd.12.6%2.0%
Group II constituents are listed below.  Metal stocks are under pressure currently and hence the impact on Sandur, Tata Metaliks and LA TIM.
Sr. No.COMPANYEXPECTATIONS ACHIEVEDRETURNS AS ON 31-AUG
10Permanent Magnets Ltd.14.4%21.0%
11Bajaj Finance Ltd.14.9%38.0%
12PI Industries Ltd.17.4%30.0%
13Action Construction Equipment Ltd.17.4%41.0%
14BCL Industries Ltd.18.9%-18.0%
15Tata Metaliks Ltd.19.0%0.0%
16Chambal Fertilisers and Chemicals Ltd.19.3%13.0%
17Shree Digvijay Cement Company Ltd.19.5%18.0%
18K.P.R. Mill Ltd.20.1%29.0%
19Bajaj Healthcare Ltd.20.2%7.0%
20Muthoot Finance Ltd.22.6%2.0%
21Bhansali Engineering Polymers Ltd.22.7%16.0%
22Shree Cement Ltd.23.5%3.0%
23SRF Ltd.23.5%56.0%
24Ipca Laboratories Ltd.24.4%24.0%
25KNR Constructions Ltd.25.4%51.0%
26Dolat Investments Ltd.25.4%46.0%
27Ultratech Cement Ltd.25.9%17.0%
28Alkem Laboratories Ltd.26.9%30.0%
29Gujarat Ambuja Exports Ltd.28.8%9.0%
30HIL Ltd.31.3%16.0%
31Godawari Power And Ispat Ltd.38.6%22.0%
32Kirloskar Ferrous Industries Ltd.40.5%4.0%
33LA TIM Metal & Industries Ltd.41.0%-15.0%
34Sandur Manganese & Iron Ores Ltd.46.4%-14.0%