The Beauty & Power of Coat-tailing - The 'Meghmani Finechem' example.
Sep 26, 2022 12:41 am
Good morning my dear readers,
I know, its a Monday!
And I know, it is probably going to be a bad Monday for markets.
But, it is one of those moments when the market is going down but your Negen PMS Portfolio's CASH levels are at 26% on average.
(Evil Grin below)
I do not have official data, but I would think your Negen PMS would have one of the highest, if not outright the highest 'Cash' component in the fund management industry at the moment.
The Beauty & Power of Coat-tailing.
Definition - 'Coat-tailing' is the strategy of mimicking someone else.
In Special Situation investing, Coat-tailing 'Promoters' becomes ever so more powerful and amplified.
Coattailing promoters is like following the 'smart money', especially in Special Situation investing.
The Meghmani Finechem example.
In 2021, Meghmani Organics demerged their 3 business divisions into two separately listed companies.
First was - Meghmani Organics which housed their Pigments & Agrochemicals business.
Second was - Meghmani Finchem which housed their chemical business.
Bur why did Negen PMS only buy Meghmani Finechem and NOT Meghmani Organics post the Demerger?
The answer lies in the 'Coat-tail'.
Rewind back before 2021 (before demerger). The Meghmani promoters went through 'great lengths' and even angered the minority shareholders by increasing their shareholding in the 'Meghmani Finechem' division at a pittance of valuation.
They took a big reputational risk in doing this.
Remember this now (my dear watsons) - They chose ONLY to increase their stake in 'Meghmani Finechem' which was the chemical business and did NOT bother to increase their stake in either the Pigment nor the Agrochem businesses.
A promoter only does the above when he thinks that the 'prospects' of the Chemical division are probably better than the Pigment or the Agrochem business.
So when the businesses demerged in 2021, we swooped into the Meghmani Finechem counter at sub 500/share and bought, pretty aggressively.
We ignored the Pigment+Agrochem division completely, just like the promoter had done.
Post Demerger in late 2021, the Indian stock market had topped out and stocks began correcting until June 2022 when Nifty hit a low of 15500 and the Smallcap index had fallen -30% approx from its peak.
Get this now, The Meghmani Finechem stock completely ignored the Bear Market and moved effortlessly from 500 to 1700/share, representing a +250% upmove inside 1 year and within Bearish conditions.
Meghmani Organics however, managed to move up a mere +11% in the same period.
Conclusion - Follow the smart money, Silly.
And in Special Situations, take it even more seriously.
Some other examples are Fairchem Organics, CG Power, Max Health special situations where the new promoters pumped in a lot of money around the time of their respective special situations.
That is all from me today folks.
I would keep an eye on IT companies if they fell another 15-20% from here. (Businesses today, cannot survive without them).
If the stock market also offers a 'Diwali sale', remember that India is a special story and lap up stocks, on the cheap. Atleast that is what we will be doing.
See you Friday, Besties.
(Shields up, Defensive position. A fun period approaches).
Founder & CEO
Negen Capital PMS
Negen Capital Startup AIF
Disclaimer: Negen Capital PMS owns Meghmani Finechem. This newsletter is only for educational purposes on the topic of Special Situations. This is not investment advice at all. We can change our mind on any of our investments at any time. Hence, its best not to blindly follow.
We are not paid by anyone to post this Newsletter. Kindly consult your investment advisor before acting on the contents of this Newsletter.
The 'Cool' news section:
The Flying Bike is here.
Sometimes I wonder, the world is going to be totally different in 10-15 years. Will be a fun ride for investors, if they keep their eyes open.
(Read this Newsletter, could be a good alternative 🙃).