What do you see in a stock before investing in it and what makes you exit it?
Select companies based on parameters like earnings growth, capital intensity and valuations.
By Anoop Bhaskar, Head-Equity, UTI AMC
As a fund philosophy, we focus on companies that generate positive operating cash flow (OCF) as defined by profit after tax + depreciation + change in working capital. Along with this, we compare the historical return on capital employed by the company. Assuming a floor of 13 per cent, we create a universe of companies that generate positive operating cash flow and those earning at least 13 per cent on the capital employed. From this universe, we select companies based on several parameters like earnings growth, capital intensity and valuations.
Ideally, an investor should hold a stock for as long as possible. It is equally important for an investor to build a ‘system’ for selling, as they do for identifying and buying a stock. This would help them to use a uniform approach for all selling decisions. Focusing solely on P/E valuation may not prove to be the best financial ratio; combining this with trend for return on capital employed (RoCE) or future earnings may give an investor a more holistic approach. As Charlie Munger puts it, "It (investing) was never meant to be easy."
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