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TechnoFunda Investing Newsletter
Weekly Wrap - Issue # 44
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Welcome to the Technofunda Investing community. Thank you for being Life Long Learner...!!!
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📈 Market Kya Lagta Hai
Nifty 50 🟢 +1.50%
Midcap 150 🟢 +0.47%
Smallcap 250 🔻 -0.35%
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Sectors in Focus
Major Corporate Developments This Week
- Balmer Lawrie plans Rs 700-cr capital expenditure, to diversify into ethanol production
- Uno Minda: Company agreement with Hyundai Mobis for manufacturing of licensed products
- IDFC Limited: Company has received final approval from NCLT for the amalgamation of IDFC Financial into IDFC Limited and IDFC Limited into IDFC First Bank
- JBM Auto: Company has announced the incorporation of a wholly-owned subsidiary, JBM Electric Vehicles International PTE Ltd, in Singapore
- Zen Technologies: Company announced partnership with its subsidiary AI Turing Technologies has launched four innovative remote-controlled weapon and surveillance systems
- Lumax Auto: Company acquired a 60% stake in Green fuel Energy Solutions for Rs 133 Cr, marking its entry into the green and alternate fuel segment.
- BHEL: Company bags order worth Rs 6,100 cr from NTPC to set up for 800 MW Sipat Supercritical Thermal Power Project
- Hind Rectifiers: Company bags order worth more than ₹200 crore from the Indian railways
- Tata Steel: Company commissions India’s largest blast furnace at kalinganagar, crude steel capacity at kalinganagar to expand from 3 MTPA to 8 MTPA with an investment of Rs 27,000 crore.
- PCBL: Company Plans To Acquire 100% Of Enersil’s Shareholding for an Amount Equivalent to AUD 2,000,100, Acquisition Aims to Enhance PCBL’S Product Offerings in a Growing Market, Particularly for Electric Vehicles.
- Astra Zeneca: Company has received permission to import for sale and distribution of Durvalumab 120 mg/2.4 mL and 500 mg/10 mL solution for infusion
- Pondy Oxides: Company announced plans to raise up to Rs 250 crore through a Qualified Institutional Placement
- Craftsman Automation: India cci approves acquisition of 100% share capital of sunbeam light weighting solutions private limited by craftsman automation limited
- KEC International: Company launches QIP to raise up to ₹870 cr, indicative issue price at ₹955/sh: CNBC.
- Hindustan Foods: Company announced the merger of a promoter-owned entity to enhance its manufacturing capabilities in Nashik, Maharashtra.
- Delta Corp: Company board approved draft composite scheme of arrangement between co and Delta penland, scheme provides for demerger of Company's hospitality and real estate business
- Fermenta Biotech: Company receives EU GMP certification for its Dahej manufacturing facility, Gujarat.
- Adani Total Gas: Company secures largest global financing in the city gas distribution business, financing will accelerate ATGL’S CGD network infrastructure development program
- Matrimony: Company plans to launch a new line of business in area of jobs called manyjob, manyjobs will focus exclusively on grey-collar jobs market
- KEI Industries: Successfully commenced commercial production of LV/MV cables in new plant in Rajasthan
TechnoFunda Investing Quote from Legends -
Peter Lynch's quote emphasizes the importance of investing in businesses with strong, simple, and resilient models that can operate successfully even if managed by less competent individuals. He suggests that some businesses are so robust and well-structured that they don't rely solely on extraordinary management to thrive. These types of companies are more likely to withstand challenges and maintain long-term profitability, making them safer investments. Essentially, he's advocating for focusing on businesses with a competitive advantage and enduring fundamentals rather than ones that depend heavily on exceptional leadership.
📚 Book I'm Reading This Week
"Principles: Life and Work" by Ray Dalio is a comprehensive guide to the personal and professional principles that have guided the author throughout his life. Ray Dalio, the founder of Bridgewater Associates, one of the world's largest hedge funds, shares insights from his decades of experience in finance, business, and leadership. The book is divided into two main sections: Life Principles and Work Principles. In Life Principles, Dalio outlines his approach to decision-making, personal development, and problem-solving, emphasizing the importance of radical transparency, reflection, and continuous learning. In Work Principles, he provides a framework for building strong organizations, fostering a culture of meritocracy, and driving success through data-driven and systematic processes. The book offers practical advice, encouraging readers to develop their own principles to navigate life and work effectively.
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TechnoFunda 101 - Power Capsules
Learn technical as well as fundamental concept in a simple way
Earnings Growth + P/E Re-Rating: A Powerful Combination for Explosive Stock Gains
In the world of stock investing, finding the right balance between value and growth is often key to unlocking substantial returns. A powerful formula that many successful investors leverage is the combination of Earnings Growth and Price-to-Earnings (P/E) Re-Rating. When both occur simultaneously, it can create a deadly combo that drives exponential stock price appreciation.
At its core, this concept is about identifying companies that not only show strong earnings growth but are also revalued by the market, leading to a significant increase in their P/E multiple. This dual force can result in stock prices skyrocketing, often far beyond what just earnings growth alone would justify.
What is P/E Re-Rating?
A P/E Re-Rating occurs when the market decides that a company’s future prospects are much brighter than previously thought, leading investors to assign a higher valuation multiple to its earnings. In simpler terms, the market starts paying more for every dollar of earnings that the company generates.
This re-rating can happen for several reasons:
- The company moves into a higher growth phase.
- It enters new markets or launches successful products.
- Macroeconomic conditions favor its industry.
- Management executes well on strategic plans, boosting investor confidence.
When this happens, even if the company's earnings remain flat, the stock price can rise simply because the P/E ratio expands. But when you combine this with strong earnings growth, the effects can be staggering.
The Power of Earnings Growth + P/E Re-Rating
Let’s break down how this powerful combination works:
- Earnings Growth: Strong earnings growth is the primary driver of stock appreciation. Companies that consistently grow their earnings show they can increase profits, often by expanding market share, launching new products, or improving operational efficiency. As earnings increase, so does the intrinsic value of the business.
- P/E Re-Rating: Even when earnings are growing, the market may initially undervalue the stock. However, once the market recognizes the company's improved growth prospects, it may re-rate the stock, assigning it a higher P/E ratio. This can occur due to increased optimism about the company’s future, better investor sentiment, or a reclassification of the company as a growth stock.
The real magic happens when these two elements work together. A stock that is growing earnings while experiencing a P/E re-rating has the potential for compounding returns as both earnings and the multiple investors are willing to pay for those earnings increase simultaneously.
Key Indicators of Earnings Growth + P/E Re-Rating
So, how can you spot companies with the potential for this winning combination? Here are a few key indicators to watch for:
- Consistent Earnings Growth: Look for companies with a track record of steady or accelerating earnings growth. This signals that the business is executing well and increasing profitability.
- Positive Industry Trends: Companies in industries with strong growth prospects or undergoing favorable macroeconomic shifts are more likely to experience P/E re-ratings.
- Improving Margins or Cash Flows: Companies that show improvements in operating margins, free cash flow, or return on equity often attract a higher valuation from investors.
- Strong Market Leadership: Market leaders in growing sectors tend to get re-rated more frequently, as they are seen as being able to sustain growth over the long term.
- Underappreciated Growth Potential: Look for companies that the market might be undervaluing due to temporary setbacks, industry disruptions, or investor skepticism. If the business fundamentals are strong and earnings growth is likely, the stock could be poised for a P/E re-rating when sentiment shifts.
Why This Combination is a "Deadly" Force
- Compounding Effect: When you combine earnings growth with P/E re-rating, the growth is compounded. For instance, if a company’s earnings double over a period and its P/E multiple also doubles, the stock price could potentially rise by four times. This compounding effect can lead to outsized returns that far exceed what earnings growth alone would have delivered.
- Market Recognition: When the market begins to recognize a company’s ability to grow earnings, it often reassesses its valuation framework for that company, leading to a P/E expansion. In some cases, stocks that were previously viewed as mature, low-growth companies can be re-rated as high-growth stocks, causing a sharp rise in stock price.
- Long-Term Potential: This combination is most powerful when it occurs over a sustained period. Long-term investors who identify companies in the early stages of earnings growth and a potential re-rating can enjoy multi-bagger returns over time.
🎙️ My Weekly Podcast For You
Keep Compounding...
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Vivek Mashrani, CFA
Founder, TechnoFunda Investing
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