Pearls of Wisdom: Basant Maheshwari on Hawkins

I received a few negative responses regarding the intent of sharing the Hawkins post on TED. This is to re-iterate, that the whole point of blogging is to better interact with other fellow investors and develop counter arguments and dissections on your investment themes.

Hawkins has been one of the prominent ideas of Sri Basant Maheshwari, a much discussed and well documented stock idea since September 2006 when it was first discussed on TED.

The Hawkins post was necessary to highlight that the company is in a somewhat special situation which calls for a compelling buy based on earnings forecast for the next 12 months. Most investors are skeptic of investing in growth stocks at high price and high P/E multiples (TTM).

Going through the Hawkins thread yields great notes of wisdom from Basantji on these points. Here we look at few of his quotes with respect to stock investments in general (and in few cases Hawkins in particular). I encourage you to go through the complete thread on Hawkins at TED.

No position is too big for a stock that is going up and no position is too small for a stock that is headed down. 

Analyzing the variability of a business can be learnt through experience and that experience is a never ending process, the easiest way to go about it is focus on a few variables like RoE, Moat, entry barriers, Capex, demand drivers, Management etc. One of the more easier ways out is to read as much as you can about the great man called Buffett, personally we are all in the learning mode and will continue to remain so because investing is an art and not science but my thought is that the path less traveled has the maximum fruit. Everyone can get the Eps, Pe, yield, Book value through some free website and that is what makes the other path less traveled.

While analysing companies I try and work out numbers such as sales per rupee of Fixed Assets and Sales per rupee of WC. Once you do that you see that smaller amounts of fixed assets and WC have generated large amounts of sales .

The first thing is forget the past and disassociate yourself from where this stock has come from. Just think that you are not aware that a stock has been a 7 bagger in the last 12 months, that will make your analysis easier.

I normally look forward because TTM (Trailing Twelve Months) is already in the price and if you can identify the difference between the consensus and your estimates in the forward earnings you are on track to make decent money.

The big money is made in foresight and not in hindsight. Everyone knows that forecasting comes with errors but that does not mean that you keep looking at the rear-view mirror only.

So if a stock had moved up hugely over the last one year the real beneficiaries have been the ones who had an element of forecasting because they could have bet hard and heavy but had you bought it as another stock in the portfolio it would have created enough excitement and joy but not wealth.

Also cooker has been a low repeat business ever since it was invented. The key areas to look out for is new customers for existing products(cookers) and new products for existing customers (Non stick cookware) and not just repeat sales to existing customers (which will also come).

Not sure why people were surprised by the dividend a general glance at past annual capex, working cap profile and management strategy would have suggested that this company has no genuine use for cash and hence it will be thrown back. Capital allocation is an offshoot of management bandwidth so we can't draw a straight line across all consumer companies.

Sometimes investors lose the big picture by becoming prey to the paralysis of analysis. I have said many times before that Hawkins is better then competitors because of the sheer cash that it throws back. Very few companies have cash eps higher then eps by 30pc and this is one of them. 

At each price we wanted to buy it 10pc lower somehow this psychological price anchoring has no answer. We should be looking at where this stock is going rather then where it has come from. 

Strong distribution and Marketing cannot provide high pricing power. They can provide volumes. For example a cement company with deep distribution set up cannot sell cement at Rs 20 more per bag just because it has a wide distribution network. Just because the unorganized competitors are weak in terms of marketing power, scale and distribution doesn't enable these companies to make high margins on their products.

As Buffett says "It takes 20 years to build a reputation and  5 minutes to lose it if you think about that you will do things differently".

The P/E is decided by the collective wisdom of the market and it is futile to take any confirmed call on that though we do make educated guesswork on the drivers of Pe and how they influence the valuation but as investors we should be more concerned about earnings than valuations, the former influences the latter and not the other way round.