Benjamin Graham invented the concept of Mr. Market. According to him. Mr. Market—the personification of the whole stock market—who comes to you as an individual investor on a daily basis and offers to buy or sell stocks at his quoted prices. The job of an investor, according to Graham, is to take advantage of Mr. Market. The investor should buy when the prices of the shares being quoted by Mr. Market are lower than their intrinsic value and sell when the prices being quoted by Mr. Market are higher than their intrinsic value.
Currently, the PE ratio of Nifty 500 is 26.9 and the PBV ratio is 2.6. However, even more interesting is that the PE ratio of our multi-cap portfolio, Scientific Alpha XLNT 25 is 10.1 and its PBV is 2.0. The Nifty 500 is market-cap weighted and hence its ratios are dominated by the larger-cap stocks, even though, it represents the top 500 stocks in the Indian markets. But the multi-cap portfolio is a set of 25 best stocks according to the Scientific Alpha Investment Engine from the whole pool of stocks with market capitalization larger than INR 1000 crores. This set of stocks is available at much lower valuation ratios as compared to the Nifty 500.
Further, let us compare the fundamentals of the market (Nifty 500) with our multi-cap portfolio (Scientific Alpha XLNT25). The RoE of the market is 9.7% while the RoE of the multi-cap portfolio is 19.4%. The multi-cap portfolio companies are compounding the shareholder’s capital at twice the rate as compared to the companies in the market portfolio. This is further reinforced when comparing the RoCE data. The market RoCE is 10.3% while the multi-cap RoCE is 25.4%.
Similarly, the typical market company has a high debt of 70% of the equity capital (net of cash). While the multi-cap portfolio company has 30% net cash sitting on the books.
Further, the multi-cap portfolio sports a dividend yield of 2.8%, twice that of the market’s 1.4%.
One could easily conclude that the multi-cap portfolio is a SuperNormal Portfolio of SuperNormal Companies at SuperNormal Prices. Does it make sense to do the trade with Mr. Market?
Let us conclude with John Templeton’s quote:
“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards.”
-Sir John Templeton
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Past performance is not necessarily indicative of future results.