Why value investing does NOT work in India (filed under unintended irony)

[netnet]

Here is a straight (not covert satire) story on why value investing does not work in India. 

 

The title is particularly bad, "Why Warren Buffetts value investing model doesn't work." As if he ever bought cigar butts that were highly leveraged! It sort of sums up the stupidity of the article.

http://economictimes.indiatimes.com/markets/stocks/news/why-warren-buffetts-value-investing-model-doesnt-work-in-indian-market/articleshow/55201873.cms

 

Basically, the idea is that low P/E companies in India are dreck, these companies with low P/E have high debt, don't work out, what with low returns on equity.  (Honestly, why discriminate aren't most overleveraged companies worldwide bad?)

 

The article is for your amusement.  It has some other "easter eggs" of stupidity.

[TwoCitiesCapital]

 

Basically, the idea is that low P/E companies in India are dreck, these companies with low P/E have high debt, don't work out, what with low returns on equity.  (Honestly, why discriminate aren't most overleveraged companies worldwide bad?)

 

 

Not sure I agree with your assessment. Haven't most studies that have been done show that low P/E, P/B, or P/FCF companies typically highly leveraged equity stubs anyways which is why they have a tendency to go kaput or rally majorly? It's because the equity is such a small piece of the EV that if the EV goes up any, the impact to the equity is major.  Wasn't this exactly what Graham, Schloss, and Buffett were doing at the beginning (and some kept doing)?

 

I mean, I did a low P/B portfolio this March with a focus on North American and European equities and it was almost ALL highly leveraged oil/gas/coal companies that were hemorrhaging cash. It's up some 45-50% this year (after falling 37% last year) even though most of those companies are still hemorrhaging cash. I've had 3-4 names go bankrupt, but then I've had names like CLD that have gone from $1 at it's lows to $6.60 as of today.

 

I'm pretty sure that's always been the "secret" of low P/E, P/B, and P/FCF investing. You're typically buying ugly, beaten down, noncompetitive companies that no one wants to own which means that you can get an adequate return in the event they don't simply roll over and die immediately because there is no competition from other buyers.  The hope is that the ones who don't die immediately and jump 200-300% will outweigh the detraction from the ones that do.

 

[netnet]

I think that the studies indicate that EV/EBIT does better than P/E by capturing indebtedness.

[DooDiligence]

It also takes a lot of intestinal fortitude to hold a concentrated portfolio of what appears to be dog vomit.

 

I'm definitely not criticising by flinging out the "dog vomit" moniker; I'm saying that I admire anyone who can analyze, understand & value these situations & then sleep soundly while waiting for them to revalue...

[scorpioncapital]

To some degree, investing in leveraged cigar butts (or LBOs) becomes an exercise in credit analysis, the ability to cover debt, to pay down debt, to turnaround the situation so that by securing the loans, the equity is secured. The first point about franchise value ties into this directly because pricing power will determine earning power and increase or decrease the leverage risk.

[InspireByReason]

I'm trying my hand at two highly leveraged situations right now. I also think the nature of the industry matters. Both of these companies are cashflow positive rental/leasing oriented businesses in industries that have recently tanked. Taking hits on earnings mostly from write downs/depreciation.

[DooDiligence]

To some degree, investing in leveraged cigar butts (or LBOs) becomes an exercise in credit analysis, the ability to cover debt, to pay down debt, to turnaround the situation so that by securing the loans, the equity is secured. The first point about franchise value ties into this directly because pricing power will determine earning power and increase or decrease the leverage risk.

 

Sounds like fun (not being sarcastic; I really mean that!)

 

So the credit analysis would involve?

 

a) Chasing down customers & discovering if product is piling up on generous terms.

 

b) Ditto on creditors, vendors & employees (are they getting paid?)

 

c) Is capex getting ignored by neccesity in order to serve all the above?

 

And of course as you mentioned franchise power, which would probably negate a, b, & c even happening unless management was living large at the expense of the business which seems like the best opportunity (or the worst if they are big owners and or there's no big chunk of leverage...)