Shivang ⚡ Profile picture
Apr 5 40 tweets 6 min read
Ankush Agrawal : Trend Following with a Fundamental Framework

A thread 🧵 on "Key Points" of @Ankush__Agrawal recent talk with @soicfinance tribe members. Kudos to @ishmohit1

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#proudtribemember
What is trend Following ?

Look for stocks making a HH-HL structure. Objective is to ride the trend till it lasts.

How is it different from Momentum Trading/Investing?

Momentum: Try to buy the stock which will rise the fastest
Trend Following: Slow Movement but a Consistent one
Speed vs Longevity & Consistency

Fun Activity: Find dream trends for trend followers in the past 5 yrs.
Why Trend Following Works?

Trend Following keeps you in sync with the markets

Business & Stocks are two different things

Market chases the best opportunities available out there.

Benefit of hindsight

Drawback Of Trend Following based only on Price Action
Too Much Noise
Lacks additional inputs to differentiate between opportunities

Role of Fundamentals
A stock's price move in medium-long term will always be driven by it's business fundamentals. eg. Earnings Growth
But, for a trend to continue, it will be driven by fundamentals(earnings has to come)

Fundamentals help by
1. Providing Additional inputs
2. Refining our selection
William O Neil's CANSLIM Framework

C-A-N : Fundamental attributes he used to look for
S-L-I-M : Technicals attributes he used to look for
Book Recommendations by Ankush
How to Make Money in Stocks by William O Neil
Harsh Reality of Markets

Something that is readily & easily known ad available to everyone at large no longer adds a lot of value
Quite Interesting:

"With the advent of tools like Screener, Value Pickr, the game changed quite dramatically. Value left on the table reduced drastically.

Pre 2013, it was quite easy to find stocks with value left on the table"
Ways of creating Alpha

Seeing under the hood in terms of what is happening in the business or company Qualitatively is what is important now in order to create Alpha.

Because once the numbers are out, it is for everyone to see, and the discounting happens quite rapidly.
"When it comes to investing, I like a multi-disciplinary approach. My first boss taught me technical analysis. So, I use fundamental and technical analysis.
If there are 1000s of securities out there and my portfolio is only going to have 15-20, I'm never going to buy something that doesn't have a great chart and fundamentals." ~ Stanley Druckenmiller
One needs a clear & Well Defined Fundamental Framwork

Surge Capital's Key Focus areas:
1. Strong Business Model

Business Model is so good that the growth is given in the business, there is a long run-way for growth and the profitability is secured
Captures the most profitable areas of a sector's value chain
Biggest Wealth Creators in the long run.

Examples:

Exchanges
Gloablly, exchanges have been a really good business model.
Gold Finanace
Any lending business issues is a credit loss. Whole issue of credit loss goes away
Zero Loss on Default
Entire Loan is backed by Gold as collateral, so the loss on account of defaults is near 0.
High ROE's
Gold loans are high yield loans with yields on loans in excess of 20% and with cost of capital at less than 10%, your spreads are very high 10%+. Resulting in very high ROE's of ~25%

No Need to Raise Capital
High Brand Value
2. Innovation and pivot
Companies that are regulary innovating & pivoting their business create some of the longest fundamental trends.
By the very virtue of innovating & pivoting, these companies are not only able to grow exisiting business, but are also able to open more business opportunites.
Continuous growth engine allows for the trend to grow.

Examples:
Varun Beverages
Earnings has continued to grow and improve YoY.

Astral Poly
Innovator in terms of CPVC's. over the last 15-20 years, they have also ventured into adhesives, Hot & Cold plumbing pipes, Water Tanks
Astral has grown it's revenue at 20% CAGR.
3. Change & External Trend

An internal change in a company can act as a key catalyst that can create a good earning trend.
Like a change from a not so good management to an aggressive management; or divestment of some business unit.
Sometimes, an external trend is what allows a company to grow at high rates year-after-year for long durations.
Examples :
Avanti Feed
Dixon technologies
Pre 2009, there was no growth in the stock.
But, one thing changed. In 2009, Government allowed cultivation of White Shrimps.
The industry started growing at 20% CAGR from 2010
Avanti being the leader started growing at 40% CAGR hence forth.
Another good example is Dixon

Government came out with the Mobile PLI scheme.

An external trend that is helping.
Because of the PLI scheme, Dixon's revenue are expected to grow from 4500 Cr in FY20 -> 12000 Cr by FY25

There are a lot of other PLI schemes too.
Market's have become really forward going. The things are really clear
4. Optionalities

Prime Focus area at Surge.
Optionalities are relatively subtle or hidden initiatives of a company which are currently not being discouted by the market.
Super charges an exisiting earning trend.
Includes seeding of new business, new products, expansion into newer geographies, some major M&A etc.
Example:

Reliance Jio

Reliance has been working on Jio since 2011
This was something which the market was totally ignoring.
No one was ready to believe back then.
In 2017, as soon as Jio was launched. Reliance MCap back then was ~$43B and in just 3 years, Jio itself is valued at >$50B
5. Leadership & Edge

Big getting bigger is a real trend.
A leader in a particular industry enjoys an advantageous position.
Some companies have some form of an edge, which allows them to grow stronger and more successful than others and eventually achieve the Leadership.
Leadership & Edge could stem from various factors like the sheer size of business, ability to offer goods/services at lower cost, brand leadership, network effects etc.
Example:

CDSL
CDSL had an edge because it was the depository for all the discount brokers.
6. Stellar Management Execution
There do exists some very sharp & astute entrepreneurs who are able to create tremendous wealth even from not so great businesses.
With these kind of managements who have a vision of doing something big and also strong execution capabilities, then even if the underlying business dynamics is not great, one can still see long term earnings growth.

Example:
Deepak Nitrite

Stellar management is what has allowed for the company to grow earnings.

From less than 2000 Cr revenue stream, it has gone up to 5000Cr revenue stream.
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