In this blog we are going to cover the performance rating of stocks that all of our value readers have requested.

Before sharing the list of quality and performance as requested, many investors claim that I emphasise a lot on ROE. According to them the best business is the one which produces growing profits. So let me take this opportunity to talk little bit about the ROE and our view on it.

Everyone who is reading this blog would also say that they all agree and it’s obvious that business with growing profits is to be considered good. As per Value operations and my philosophy, the best business to own is the one which not only grows profits but also require least amount of capital to be invested to generate those profits.

There is a yawning chasm in the worth of business that need additional capital to grow profits and the one that doesn’t.

Many people claim to me that then the perfect business might be one that requires no staff and thus have no labour cost, no machinery and so does not require any equipment to be maintained or replaced, and no inventory, so there is no need of trucks, warehouses, supply chain management and no chance that you might be holding products that are obsolete or out of fashion. Our philosophy is that, if all these things are required by any business, means there is less cash to distribute to you or less cash to be invested elsewhere. Therefore first prize goes to the business that generates very high returns with all those profits available to be distributed or reinvested as you, the owner, see fit.

In the chairman’s letter to shareholder in 1977 of Berkshire Hathaway, Buffett expressed the importance of return on equity as a measure. He said:

 

Except for special cases (for example, companies with unusual debt-equity ratios or those with important assets carried at unrealistic balance sheet values), we believe (a more appropriate measure) of managerial economic performance to be return on equity capital.

In 1992 he said this:

The best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite – that is, consistently employ ever-greater amounts of capital at very low rates of return.

ROE is not just today’s flavour of investigation by many analyst or investors. It has not received the same emphasis in analysis and commentary as, for example, earnings growth. The market is flooded with companies that report rising profits and even record profits, while its economic performance as measured by return on equity is deteriorating.

Ultimately, it is return on equity that drives share prices; in the short-term the share price of a company with solid earning growth may raise, if that growth is not accompanied by superior rates of return on equity, it will eventually reflect the value of the underlying performance of the business.

ROE is one of the important constitute of our quality and performance ratings and even for calculations of value. But it is important to remember that it is one of the thirty metrics. We know the weakness of this ratio, but the most important part is that we know how to overcome those weaknesses.

Finally before heading to the list, many had asked me how I accumulate any stocks. Once we identify any quality stocks, the decision on its weighage on our portfolio depends upon the available discount to its value. For example, if we identify any stock which is trading at 50% discount to its intrinsic value then we buy almost 90% of allotted capital on that stock. If it slides further, then we accumulate the remaining. Same way if we are getting a discount of mere 10% to its value then we buy only 10% of allocated money to that share and wait for further discount.

Names

Value operations Quality and performance rating

Orbit Corporation

C4

Uflex

C3

Genus Power

C4

Electrosteel castings

C3

J Kumar infraprojects

A4

Jyoti structure

B4

Shree Ganesh jewels

B2

Aurbindo Pharma

B4

Pirmal Glass

C2

Unichem Labs

B3

Page Industries

B3

Titan Industries

B1

Eclerx

A2

Opto circuit

A3

Crompton Greaves

A3

REC

B3

BHEL

B2

Venky’s India

B3

Nesco

A1

Noida toll bridge

B2

You will notice many companies from the list are missing. It might be because either those companies do not trade on National stock exchange (NSE) or are in finance or NBFC sector. My apologies for any inconvenience caused but at this stage we only have data on companies trading on NSE and we are in process of updating all the financial and NBFC stocks.

Something to remember about quality and performance ratings…

Rated A(1-4), B(1-4) and C(1-4), every listed company is rated based on a series of over 30 separate metrics, measured at both a point in time and over time. Most importantly, the Quality and Performance Rating is applied without any subjectivity. All companies are judged according to the metrics they generate. A1s have the lowest probability of a liquidation event. “Lowest probability” however doesn’t mean a liquidity event won’t occur. It just means far fewer A1s will have a liquidity event imposed on them compared to C (1-4). A liquidity event includes a capital raising, debt default or renegotiation, administration, receivership etc. An A (1-4) company could of course raise capital if it needs to fast track construction of a new factory. Sticking to A1s and avoiding C’s should, over time, produce better returns.