Stallion Way of Investing – How we identify emerging leaders & trends

How do you catch the investment trend with your investment philosophy?
We generally follow Buy and Rotate Strategy rather than Buy and Hold strategy. Every Bull Market has a Different leader; we find the leader in every bull market and stick to it. There is No Bull Market without Earnings Growth; we always buy sectors with high expected sustainable growth of more than 20% for next 3-5 years. Winners of Previous Bull Market will not lead the next bull market. We like to buy companies that are making 52 week Highs, rather than new 52 week lows. The more market believes in the longevity of growth, the more valuations the stock will get for Long Term Investment.
How do you take the advantage of inflation in your fund management strategy?
Our portfolio compromises of companies which are usually inflation proof. High inflation, low inflation, interest rate rise or fall whatever comes in our path, we want to make sure our companies will do well irrespective of all these macro events. We remain confident that by being in market companies who are market leaders or emerging market leaders they have the ability to survive in all market cycles. We have seen that by usually being in four sectors of consumer, pharma, financials and technology, our portfolio remains well balanced mostly across market cycles. While consumer and pharma helps us in bad times, financials and technology helps us to do well in good times.
Has the recent war situation affected your portfolio performances?
We are absolutely aware that good times are followed by bad times and bad times are followed by good times. 2018, we had IL&FS, 2020 we had Covid and now the war. What we have realised is those who take advantage of these bad times are always rewarded in good times. Of course this is always in Hindsight. Very easy to say but extremely difficult to follow because also needs emotional discipline.
The idea is to stay invested irrespective of good or bad times. This is why we keep the beta of our fund low as well but still makes sure we want to outperform the market. Our goal is to help our clients for the next decade and we remain confident emerging themes. We have a saying in our office, never be too pessimistic on India, but do not be too optimistic as well. Stay level headed, buy good companies which are market leaders or emerging market leaders, stay with the market, cut losers, ride winners.
Why do you use a sector rotation strategy and get the most out of it?
In bad times consumer and Pharma are considered defensive in nature. These protect our downside risk of the portfolio, while financials and technology help us in good times taking advantage on expectation of the economy doing well. These four sectors broadly form a base of the portfolio.
We also like to be with themes which are emerging in nature. Change is usually the only constant in markets. For example, IT was a mega theme in late 90s, real estate and commodities in 2003-2008, the index did not do anything for 5 years from 2009-2014, but Pharma was where the most returns got generated. We had NBFC’S in 2015-2018. Technology was a clear one right now post the pandemic.
The idea is to be with these emerging themes as they develop and be with the trend as long as it lasts. Of course there were a lot of commonalities in these themes, such as a large change in a sector, huge opportunity size, earnings growth and longevity of the growth. By marking sure we stay with leaders and not going down the quality curve, our goal of both capital creation and capital preservation is achieved.
As on 31st March 2022
How do you target sectors with your valuation strategy?
For our Leaders, these companies usually are recognized by the market but where we get our returns is the ability of these businesses to do very well in bad times. Because these business have great longevity of growth and are extremely resilient in bad times, the markets tend to punish them far less. These business because of their consistency give decent compounding returns over 3-5 years.
In our emerging leaders theme, identifying them earlier than the market, we get both PE re-rating and earnings growth which sort of gives us those multiple returns.
So by buying leaders or emerging leaders, the market is extremely efficient in getting these companies right in terms of valuation because you do not get it cheap most of the times unless the entire market corrects.
But we like buying companies which are fairly expensive, not too expensive though, because these companies usually make highs. It gives us a great sense that the market believes in our thesis, bidding these stocks higher. We like our companies making highs. However bullish we are though on any company, there is no use being too bullish on it unless the market does not believe in it.
The market needs to confirm your thesis in terms of price action as well.
Last 3 years markets were good, your portfolio performance should also show us how you manage the downside.
The given below is the snapshot of the comparison of Allocation of Stocks when in Jan 2021 and Jan 2022.
Capital Allocation for the Jan 2021 in Core Fund
Capital Allocation for the Jan 2022 in Core Fund