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(https://vivekmashrani.com/)

Bamboo Investing – Rise of Phoenix in Stock

Markets
The title of the post is Bamboo Investing. It’s not about investing in bamboo trees, let me clarify that
first. It’s about mental models way of learning. Also, there is no real phoenix in the context!

Before we get to the point, here is a small puzzle. Below are the share price charts of few companies
over certain time period. What is common between them?

Company-1: Specialty chemical company

Company-2: Auto manufacturing company

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Company-3: Shrimp exporting company

So having started with puzzle, now there is another anecdote for you. This is about Chinese Bamboo.
For those who haven’t seen it, the picture is below. This will help you understand Bamboo Investing
concept.

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Chinese bamboo tree is very typical. It can grow vertically almost 90 feet (that’s almost as tall as a
building!!).

This is how it GROWS:

One waters the bamboo tree for four straight years and nothing happens – absolutely NOTHING..!! The
seed remains in the ground.

Then suddenly miracle happens in the 5th year. The Chinese bamboo tree finally emerges from the
ground.

Within matter of six weeks it achieves height of 90 feet….just 1.5 months after waiting of 4 long years..!!

Learning from the story…

This is the common theme of the initial puzzle. A good stock may remain dormant and boring for
many years, and then it would accelerate to surprise everyone. As such this can happen for the entire
sector or most of the stocks in any country depending upon triggers.

One should watch for improvement in business fundamentals and Earnings power. If the prices don’t
move and business is improving, that’s the best ground to hunt.

So the answer to the puzzle is that all of the above companies were boring and dormant but
accelerated to become multi-baggers in very short period of time. The companies were Vinati
Organics, Eicher Motors and Avanti feeds but that’s not important here.

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What are the triggers?

Now, the above outcome is bit surprising since we say that markets are efficient. Then is there any
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anomaly?
Well, I have tried to think through and found that there are mainly two broad factors that drive it:
Rapid earnings growth and PE re-rating (Had discussed this in detail in my article: Investing in 100
baggers (https://vivekmashrani.com/quest-for-investing-in-100-baggers-in-india/))

1. Sector and country re-rating:

This can happen when there are certain key changes in the sector and country which can expand the
PE multiple rapidly despite no change in earnings growth (mostly in anticipation of future earnings
growth)

Examples:

Entire Indian market got re-rated in 2014 after new government got majority in the elections
PSU oil companies got re-rated due to deregulation of fuel prices
Specialty chemicals and graphite electrode industry recently got re-rated due to shutdown of
factories in China

2. Company is widening moat for long term:

There might be instances when companies are spending in R&D, Brand building, building distribution
network, trying to launch new product, trying to enter new markets, spending heavily to gain
economies of scale or creating network effect etc. Basically, they are bleeding today to achieve
sustainable long term growth.

This reflects poorly on income statement for short term but Earnings power of the company is
constantly increasing which results in exponential long term growth.

Examples:

Amazon hiring staff to increase future sales by making systems and servers more efficient
Thyrocare taking hit on the margins to quickly gain market share from lower prices and harness
economies of scale in future
Ola/Paytm keeping 0% fees for partners (drivers/merchants) to achieve network effect
Tata Sky giving set-top box free/subsidized to new customers to bargain better with content
providers in future

3. Efficient Capital Allocation:

When companies demonstrate ability of efficient capital allocation creating shareholder value, then it
can get re-rated and further execution accelerates this.

Examples:

Piramal enterprises sold part of Healthcare business to Abott in 2010 when it was trading at cash
bargain, and now it has been rapidly re-rated due to efficient capital allocation (Read case study by
Sanjay Bakshi: The grand strategy of Ajay Piramal
(https://fundooprofessor.wordpress.com/2011/03/26/the-grand-strategy-of-ajay-piramal/))
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4. Increased disclosure or market cap levels/low liquidity:
There are several instances where disclosures for many small and midcap stocks are minimal. Also,
some of these companies are too small to form part of mandate for large investors.

There may be very low liquidity for the stock. In these cases the stock gets re-rated very fast once it
start falling under mandate of institutions or after improved disclosure levels.

Examples:

Companies like Poddar Developers and Mold-Tek Packaging did a QIP which resulted in higher
disclosure and comfort from institutional shareholding
Companies like Veto Switchgear coming out from SME exchange and getting listed on BSE and NSE,
thus constraint of many funds that cannot buy on SME platform gets removed

5. Structural turnarounds:

Many companies could be showing lower earnings or losses due to some structural bottlenecks. But
when this gets resolved, there may be turnaround in the fortunes of the company.

This may be triggered due to single event like debt repayment, management change, regulatory
change, change in strategy, consolidation of industry, structural fall in raw material prices etc.

Examples:

Indo Count industries changed its strategy and product lines after coming out of BIFR and it became
100x in ~2-3 years thereafter
Symphony changed it strategy from buying assets to becoming asset light and stock became multi-
bagger
There may be several such factors which may result into multi-fold returns in very short period of
time. But not every company which is dormant or boring will move like this.

One needs to ignore price movement and see if business is continuously improving. The lesson is one
needs to stick to the original theme and if its intact or improving then just hold on.

Thomas Phelps in his book 100 to 1 in the stock market (http://amzn.to/2kMRW5Z) wrote
that – Investors have been conditioned to measure stock-price performance based on
quarterly or annual earnings but not on business performance. Ideally the focus should be
on business performance.

Its important to focus on Earnings Power coupled with business strength.

How to identify such companies?

We can use TechnoFunda approach i.e. combination of Technical and Fundamental analysis to find
such Bamboo Investing stocks. Some of the technical indicators like price-volume break-outs,
momentum indicators, formation of trend lines are very powerful to identify such companies at
inflection point.
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Adding fundamental analysis on top of it can filter some of the false signals generated by technical
and helps to identify and ride such companies with conviction and then again technical analysis can
be used to determine Hold or Sell criteria.
Example:
Companies like BEPL, HEG etc. gave clear technical indications and this was coupled by fundamentals
like ABS prices going up coupled with capex for BEPL and graphite electrodes prices going up for HEG
along with shutdown of capacity in China.

SEE TECHNICAL CHART BELOW FOR HEG:

There was price-volume (https://vivekmashrani.com/screening-strategies-using-price-volume-

action/) break-out during Aug/Sep -2017 at ~250-300 and stock became almost 8x in less than 12
months. The fundamental new around closing of competitor came soon after break-out giving
fundamental confirmation and conviction to hold. This was further accelerated by shortage of supply
in the market and promoter buying.

Do note that it is important to also have exit strategy in place as it falls under cyclical stocks. More on
exit strategy on some other day. Enjoy Bamboo Investing process.

Thus, one must use TechnoFunda approach to identify such stocks and once these are identified
correctly, just SIT tight until the story plays out and then average up to enjoy the Bamboo Investing
way of wealth creation…!!

Disclaimer: All stocks quoted are just for example, these are not buy/sell recommendations. Please
consult your financial advisor for any investing related decision.

Chart credits: https://in.tradingview.com/

29 Responses

December 26, 2020 at 10:16 am (https://vivekmashrani.com/bamboo-investing-rise-of-phoenix-in-stock- 

Mukesh Kumar markets/#comment-11)

says: