Shankar Sharma, the vice chairman and joint managing director of First Global, loves to pick up the ugly ducklings in the stock arena. All the while screaming from the rooftops that investing is “90% luck, 10% skill.”
Without much ado, let’s look at four of his stock picks to decipher his point.
AMAZON
Lehman Brothers warned that Amazon risked running out of cash mid-2001 and urged investors to avoid its convertible bonds. The note spoke about the “extremely weak and deteriorating credit rating, negative cash flow, poor working capital management, and high debt load in a hyper-competitive environment.”
(In retrospect, the irony is delicious- Lehman Brothers on the demise of Amazon).
Morgan Stanley’s Mary Meeker saw no upside and possible modest downside to her quarterly revenue estimates, and also saw no catalyst for the stock "until they make or break the December quarter." She predicted losses of $96 million in the June quarter and $83 million the next quarter. Meeker is no ordinary analyst. Called “Queen of the Net” by Barron’s, and a “market mover” by the Wall Street Journal, she was the diva of the internet age.
When Sharma analyzed the stock, there were two factors that grabbed his attention. The first being that Amazon had turned the corner and was free cash positive; the second being that it hit rock bottom. He saw that the company had made $139 million in free cash in one quarter. With $139 million of free cash staring you in the face as the prophets of doom predict its downfall was something that just did not make any sense.
He got onto a call with Amazon - Jeff Bezos and his CFO with the sole intention of confirming the math. They did. Which meant that the bankruptcy risk was gone.
He piled up into the stock in February 2001.
- Bought at: $15
- Current stock price: Over $1,840
- Trigger: Cash flow turnaround
- Current Status: Hold part, Sold part
(The Amazon stock has split thrice between 1998 and 1999, before Sharma purchased it.)
APPLE
Steve Jobs returned to Apple late 1996 with the stock approaching $4 per share and annual revenue rapidly declining.
In the quarter ended December 30, 2000, the company posted a net loss of $247 million (after taking into account investment gains and losses and the effect of SFAS No. 133 adoption, that was modified to $195 million).
When Sharma picked up the Apple stock in 2001, it’s market cap was only $6.7 billion. Net of cash, the market cap was $3 billion; less than the market cap of Infosys Technologies back then.
It was the launch of the iPod which got his attention. His back-of-the-envelope calculation showed that based on the figures for Sony Walkman, it could be a reasonable hit.
- Bought at: $19
- Current stock price: Over $199
- Trigger: Launch of the iPod
- Current Status: Sold entire holding
(The Apple stock has split four times, 1987, 2000, 2005, 2014. So Sharma's returns, once split adjusted, would be much more impressive.)
INDUSIND BANK
When IndusInd Bank’ stock price was about the same as the Book Value of the company, Sharma got interested. With a BV around Rs 40, it was the cheapest of private sector banks offering a terrific risk/reward.
The market cap of the company then was Rs 1,400 crores.
Around a decade ago there was a management change, which got Sharma’s attention. He rationalized that the new management could not mess up compared to what the previous one had done. So even a modest improvement would have favourable repercussions as the banking sector was still very attractive. As banking licenses are not doled out like stock broking licenses, it’s a limited competition sector.
So apart from a good top down view, within the sector was a stock at an amazingly cheap valuation. It was the makings of a good trade.
- Bought at: Rs 46
- Current stock price: Rs 1,818
- Trigger: Change in management
- Current Status: Sold entire holding
TWITTER
In 2016, Sharma began to consider Twitter when the stock was in the doldrums. When the stock was listed on Nasdaq in 2013, it opened at $45.10, but was quoting at around $17 three years later.
The rise of extreme right-wing politics across the world calls for a platform; Twitter is the only platform in the world where you can vent, troll and attack opponents and reach individuals who you would normally never obtain access to. That got his attention.
In 2016, the company was planning another round of layoffs, was struggling to grow top-line results, and in the second quarter of the year reported a net loss of $107 million (an improvement over a net loss of $136.6 million in the year-earlier period).
However, quarterly revenue was up 20% year-over-year. The company had very little debt. Free cash was around $600-700 million every year. It was a solid company, with a solid EBITDA, and a solid free cash flow. The bottom-line loss was also due to some element of depreciation and a big element of stock options.
- Bought at: Around $17
- Current stock price: $34
- Trigger: It was not a cash-burning tech company, but had a solid free cash flow
- Current Status: Holding
Where’s the luck, Mr Sharma?
You can get into a good trade. You can make a bit of money. But to make 100x your investments requires a dose of good old-fashioned luck.
Nobody could have predicted the stellar rise of these stocks. Not Jeff Bezos or Steve Jobs or Tim Cook. I doubt if the management at IndusInd Bank thought that one fine day their market cap would be what it is now. That part is luck.
To capitalize on that luck, you need skills, you need to do your homework – that is the 10%. Hence, I say, investing is 90% luck. But you cannot get lucky if you don’t put in the hard work of 10%.
