Last few weeks

The last 3 to 4 weeks, the emerging markets stock indices have been underperforming the developed world.

In particular, the Indian stock market which crossed 20K briefly this year is back to the high 18's. While this is not a significant downturn, it is a correction that also caused a carnage among the mid-cap stocks.

As always, at Beowulf Capital, we ignore macros and invest in companies that we believe will grow and thrive in the long run. As the carnage was underway, we were net adders of capital into the market. Some of these bets will take a while to make money but we always like discount sales in the stock market. We especially are tuned to discount sales of stocks on our watchlist. Volatility in the market does not bother us, we have balls of steel. We are interested only in performance and ethical management.

In the last few weeks, we have added to our positions in YES Bank, Shriram Transport Finance, Titan and initiated positions in ICRA and Voltas.

In dec, we had sold out of our positions in ICRA at about 1,450 citing concerns about the IRB model and its impact on ICRA. At 30% lower price, we think we are comfortable owning the security. We bought into the positions when the market cap was a little shy of 1,000 crores. With about 278 crores in marketable investments, a good business model is available at a fair discount. It is a small position that we have initiated and we are comfortable that it does not form a big portion of our portfolio.

In the investing world (especially the value investing world) majority of the folks tend to look at price to book for financial stocks. For a long time, we were firm believers in this logic. One cannot go very wrong with buying stocks at or under liquidation value. However, at Beowulf, we are of the opinion that growth is part of value. We like to underpay for growth as well. Whenever, we find stocks whose growth is underpriced, we look at the probabilities that the stock will be worth a lot more a few years down the line and we buy the stock. Of course, we need to be comfortable to a reasonable extent with the management as well.

Two stocks that has caught our attention are very expensive using traditional price to book ratio. Both of them trade at or around 2.5 times book value. One might argue that at these levels the growth is fully priced in. We are skeptical of it. If the last twelve months earnings are north of 20 to 25% of total book value and if the business model suggests that these level of earnings will continue in the future without taking on undue risks on the balance sheet, our hypothesis is that, 7-8 times pre tax income is a better indicator of the value of the firm. This multiple ensures that all the future growth is still available to investors. Else, the firm will end up trading at 2 to 3 times earnings, which does not make sense to us.

We deliberately tend to keep the portfolio positions in financials at a relatively smaller levels compared to our bigger stocks. Our top three positions make up around 60% of our portfolio. So, net-net, we felt comfortable adding to our positions in YES Bank and Shriram Transport Finance. Both of them are terrific franchises. We had initially initated YES Bank positions in Dec 2011, this is first time we have added to the positions since then. Shriram transport finance is another niche player with little competition that allows them to earn above average ROA. The volatility is higher on the stock but we are not bothered. We use the opportunities to add to our existing positions.

We have also initiated position in Voltas. As the stock crashed through 52 weeks low, we initiated the position and added more as it continued to drift downward. This is an opportunistic stock in a cyclical industry. We are not looking for overnight returns. With an ethical management from Tata group running the companies and with an insiders perspective on the HVAC industry (I work in it) I feel comfortable holding these stocks.