CCP valuation multiples correct 30% whilst fundamentals continue to compound at over 20% per annum
CCP portfolio companies’ valuations have become 30-35% cheaper over the last 12 months. Given that Free Cashflows of these companies have compounded at 5-7% higher run-rate compared to their earnings consistently over the last 5-10 years, their current valuations (on a Price to Free Cashflow basis) are significantly cheaper than where they were 3 or […]
When ‘Loss Aversion’ Meets ‘Time Horizons’ in Equity Investing
Investors’ decision making is often underpinned by a key psychological trait – loss aversion. As explained by Noble laureate Daniel Kahneman, the result of ‘loss aversion’ is that our pain from losses is more than twice the joy from equal amounts of gain. Juxtaposing this idea to the CCP investing approach discussed in our book […]
Divis: Greatness in Indian Pharma
It is rare to find an Indian pharma company which makes systematic investments towards building the customer’s trust, improving compliance and ramping up manufacturing efficiency. Divis Labs is one such company that has delivered on these fronts for almost three decades. It has been the preferred manufacturing partner for major Western pharma companies on the […]
Four years of CCP: 98.2% total returns, 18.6% CAGR
A review of the last four years of CCP returns highlights the consistency of performance across investee companies – almost all constituent stocks have compounded their share prices at 15-30% annually demonstrating that stock selection contributed significantly to portfolio returns. Additionally, portfolio management tools such as the Longevity Framework and Margin of Safety & Sustainability […]
Think First Principles, then Disrupt & Dominate
Several CCP Portfolio companies have announced business initiatives which seek to change the paradigm of certain industries – such as Titan (Caratlane), Asian Paints (Home Décor and backward integration) and Bajaj Finance (Fintech related initiatives). All of these initiatives are already profitable with a potential to leverage the existing core strengths of these companies to […]
P/E Multiples are Deceptively Dangerous
A stock trading at a P/E multiple of 50x could be cheaper than one trading at 15x P/E multiple, even if both stocks deliver the same profit growth. This is possible due to factors such as superior capital efficiency (measured by Return on Capital Employed) and greater longevity of free cashflow compounding. Moreover, a focus […]
The Irrelevance of Short-Term Investment Performance
Short term (less than 12 months) performance of an equity portfolio is significantly affected by noise. The tools that can help deliver consistent short-term outperformance over benchmark indices usually bring with them the risk of compromising long term (3 years or longer) absolute returns. For instance, Berkshire Hathaway’s monthly performance has exceeded that of S&P500 […]
Maximise the ‘Signal’, Minimise the ‘Noise’
An investor looking to compound her wealth through equity investments faces two key risks: (a) the risk from short term fluctuations in stock prices (i.e. noise); and (b) the risk of long-term capital erosion/weak returns due to investments in sub-standard companies. To mitigate these risks, the investor can utilize two tools. Tool#1 is to increase […]
CCPs Increase Investments During a Crisis
Historically, once every five years, Marcellus’ CCP companies have faced a challenging external environment. In such instances, CCPs have ramped up capex and working capital investments (ex-financials as these parameters are not applicable to them). This has been followed by a sharp acceleration in the franchises’ growth rates in the subsequent 3-4 years. FY22 was […]
CCP’s Capital Allocation is Shifting Towards Tech Capex
As technology adoption becomes ubiquitous, the competitive advantages of winning businesses will be determined by their quality of capital allocation across four distinct layers – Enterprise Resource Planning or ERP (backbone), operational optimization (muscles), data analytics (brain) and customer interface (face). While a traditional business begins its tech investment journey from the first layer (ERP) […]
Studying the ‘Holiday Schedule’ of Consistent Compounders
Share prices of CCPs often go on a ‘holiday’ for 12-24 months, delivering weak or no returns. These ‘holiday’ periods of share price are typically uncorrelated with fundamentals because during such periods these companies continue implementing initiatives to enhance the sustainability of their competitive advantages. Once the ‘holiday’ period ends, share prices of CCPs deliver […]
Mistakes, Lessons, and Strengthening of our Research Processes
Marcellus’ fund managers and research analysts continuously evaluate their decision-making to identify mistakes made and hence lessons learnt to help improve the quality of our investment decisions in future. In 2019 and 2020 we lacked granularity in our assessment of capital allocation decisions made by companies in our coverage universe. This resulted in our decision-making […]
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