I’ve received a lot of emails over the past few days on my report on Opto Circuits (OCIL) and my “latest view” on the stock in light of its continuous fall – now down almost 11% from my intrinsic value of Rs 130.
Some people have also sent me hate mails asking why I researched and reported on a dud company like OCIL that is facing the “biggest problems faced by any company in the world”.
One reader also blamed me saying – “In my opinion you have just had a look at the presentations on the website of the company and not put your mind on the bigger picture.”
One reaction I can have on such emails is to rue my luck and curse myself for reporting on OCIL.
“How could you touch such a company?” the “expert analyst” inside me is itching to say.
But if I look at the positive side of OCIL’s fall, especially since many readers would only remember the fall that happened after my report , I can think of five “positive” outcomes:
- People will stop taking my reports seriously, and instead do their own homework after reading whatever I write, and not buy any and every stock that I cover via StockTalk.
- People will not treat my reports as “recommendations”, which many have been doing (given the hate mails). This is despite the fact that I have always suggested in the past that my reports are not to be treated as recommendations, but just as explanation of the process one can use to analyze a company on his own (through the checklist process etc.)
- People will expect me to write fewer StockTalk reports in the future, which will mean that I will have less chances of reporting on “dud” companies like OCIL.
- I will be left with only those readers who believe in my vision of creating value through teaching the process of investing (the investment education part) than the few random outcomes (like OCIL).
- People will finally realize that even I make mistakes…and a lot of them.
Now, you must be itching to say, “Cut the story short, Vishal! Tell me what I must do with my Opto Circuits?”
See I said – despite all my disclaimers, people still look to me for “stock tips?” or “what to do with XYZ stock?” – two questions I am never comfortable answering.
But as a long-time tribesman, Mansoor wrote in a testimonial for the Art of Investing Workshop…
Vishal will make every effort to make you understand about investing and he will not give you so-called tips even if you pay him.
So, even if you want to pay me money for receiving stock tips, know that I will refuse your offer because I don’t offer tips. I will never get back to that business.
Now since you are about to curse me dead for not telling you what you should do with OCIL, here is my view on the stock – but not what you should do with the stock, but what I would have done if I had the stock in my portfolio.
What I would do with Opto Circuits?
1. Ignore rating agencies
First I would ignore what rating agencies are saying about OCIL. Here is what Deepak Parekh (if you can’t trust this man, you must not trust any other corporate leader in India) has to say on rating agencies…
I think it is about time someone rates ratings agencies. What have ratings agencies achieved in the US with subprime? Even in India, we have had a case of short-term A1-rated commercial paper being downgraded straight to default overnight. In such a situation, how are investors able to take care of themselves?
So if I can find that the biggest reason OCIL’s stock has been punished is because of the suspension of its rating by ICRA (the same agency that had rated Reliance Power’s IPO at a grade of 4 out of 5, indicating above average fundamentals ), I will probably sell most of my other stocks and buy a big personal stake in OCIL at the current valuations.
Now, some people are waiting for CRISIL’s rating on OCIL as the company has already suspended ICRA from its services (so ICRA’s rating sounds like more of a tit for tat for OCIL – “You suspended us? Now, we’ll suspend your rating!”).
My question is – How trustworthy will be CRISIL’s rating? For me, not an inch more!
So overall, I will not take a rating agency’s advice to decide whether to buy or sell OCIL, or any other stock.
2. Ignore Mr. Market
Here’s what Benjamin Graham said about the madness of Mr. Market, his man representing stock prices…
If you look to Mr. Market for advice, you are destined to fail. But if you look to Mr. Market for opportunity, if you attempt to take advantage of the emotional extremes, then you are very likely to succeed over time.
With OCIL, I won’t let Mr. Market – the stock’s price – decide whether I should sell it, or hold it, or buy more of it.
Remember, in investing, a past decision or a past stock price holds no importance in what you decide to do with the stock today.
We all make financial mistakes. But when you realize you’ve done something wrong, try not to think about the money (and time and emotion) you’ve already spent. Instead, decide what to do based on the present and the future.
So, don’t think how much you lost given your investment in OCIL fell from Rs 100,000 to Rs 80,000. Think what you can do with Rs 80,000 now so that it grows back to Rs 100,000 (and more) in the future.
In other words, don’t think in terms of “costs”, but in terms of “opportunity costs”.
In the book Why Smart People Make Big Money Mistakes and How to Correct Them, the authors write:
Once your money is spent, it’s gone. It has no relevance. To the extent you can incorporate that notion into your financial decisions, you’ll be that much better off for trying. If you’re debating the sale of an investment (or a home), for example, remember that your goal is to maximize your wealth and your enjoyment. The goal is not to justify your decision to buy the investment at whatever price you originally paid for it. Who cares?
What counts, in terms of getting where you want to be tomorrow, is what that investment is worth today.
So, simply avoid the advice of Mr. Market and get over that ‘I can’t quit’ trap. Instead, use Mr. Market as an opportunity to buy more of OCIL in case your analysis tells you to buy the stock now.
OCIL will not become a ‘buy’ just because the stock falls to Rs 100, or its P/E drops to 5x. It will become a ‘buy’ only if your analysis of the business tells you that at 5x P/E, the value of the business is much greater than the stock’s price.
3. Review my analysis of OCIL
Whenever I research a stock or buy a stock, I always start with the expectation of going wrong in my decision.
This was also true when I analyzed OCIL. I had clearly outlined my concerns on the company’s stretched working capital situation. This is what I wrote:
My biggest concern regarding OCIL is the company’s high working capital requirements, which is blocking precious cash. While the management has suggested that the working capital requirements are gradually coming down as the company is integrating its subsidiaries and shifting manufacturing closer to the markets in which it operates – which might subsequently result in faster finished goods delivery and thus faster payments by clients, but I’ll still wait for the actual numbers to see where the working capital and thus the FCF are heading.
So, I started with the assumption that things could get worse on the working capital front. On the contrary, OCIL’s working capital situation has actually improved in the latest completed quarter, and in line with what the management had expected.
Now, just because a rating agency has raised its concerns on the company’s working capital, I won’t run towards the gate and get caught in the stampede.
Instead, my reaction to the rating agency would be, “Boss, thanks for the concern…but you are late! Most investors already know this for a fact.”
Anyways, some investors are also raising the issue over how the company has not been paying taxes for years and why this is fishy.
I just hope India’s tax authorities were so inept (though they are somewhat!) that they did not point fingers at OCIL for so long for not paying any tax. When they can deal with a much bigger Vodafone, why special treatment for OCIL?
OCIL has been operating from tax-free zones (now from Malaysia as well) and that’s why its tax rates were negligible in the past. The company now pays tax at an effective rate of around 5-7%, and this is what the management expects it to pay in the future as well.
If there’s one thing about OCIL’s financials and reporting, I was particularly impressed by its recent decision to treat a part of its R&D costs in the Profit & Loss account, which will impact its profits somewhat but will provide a more realistic picture of the company’s operating performance.
Most other companies of this size, if given a chance, will transfer all their expenses to Balance Sheet, thereby showing inflated profits!
Overall, I remain concerned about the company’s working capital, which while improving, needs to get much better for me to become more comfortable with the company’s balance sheet.
But other “concerning” aspects, including ICRA’s rating, don’t bother me much. If OCIL were to go bankrupt in the future, which any company that has some debt on its books can, it will go bankrupt and the rating agencies will “reveal” that later!
4. Review my holding of OCIL
If I held some stock of OCIL in my portfolio (which I don’t do because I am fully-invested as of now), here are some possible scenarios I will consider:
- If the stock is already 5-6% of my portfolio, I won’t buy any more just to average my costs. If I continue to believe in the story (without falling for “endowment bias” that makes us love what we own), I would hold on to whatever I own. Buying more just for the sake of “averaging” is most often a bad policy.
- If the stock is already 5-6% of my portfolio and I realize I made a mistake in buying the stock because the business is not going to be as strong as I expected it to be when I bought the stock, I will sell it even if the loss is ‘just’ around 15-20% and I can still digest greater losses.
- Using Graham’s technique, if I have been holding OCIL for the past 2-3 years, and the stock has not given me more than 50% return, plus I also don’t see as much strength in the business as I did earlier, I will sell the stock and reinvest the money in a better business that’s available at a bargain price.
- If the stock is just a small portion of my portfolio (say 1-3%) and I continue to believe in the story (without falling for “endowment bias”), I would buy more of the stock.
In the same way, you can create your own scenarios and take a decision accordingly.
Overall, if I believe in the story with complete integrity, I will hold or buy the stock based on the scenarios suggested above.
But if I do not believe in the story anymore – because of my changed view on the business and NOT due to the decline in stock price – I will not let my ego come in between, and I will simply sell the stock at the current price and take my lessons.
As Prof. Sanjay Bakshi shared in his recent interview:
- There are no mistakes, only lessons.
- Learning does not end.
So this was my view on OCIL, and what I would have done if I had owned the stock.
Also, I’m sure you will now take my StockTalk reports with two pinches of salt, for I am myself in the process of making mistakes, and learning from them.
What do you say?