exceptional stock market returns in turbulent times

2016

Atul Khekade

Atul Khekade is a serial entrepreneur,

financier and Advisor.

The Cases of Exceptional stock

market returns in turbulent times

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The volatility in global equity markets in the recent times has left a bad taste

with many investors. With fears of global economy going in jitters, many

investors are clueless and have started questioning whether the stock market

is a safe place to invest at all. This case based white paper discusses patterns

that repeat itself irrespective of the state of the global economy and yields

exceptional returns in a 3 to 7 year horizon.

About the Author :

Atul Khekade is a serial entrepreneur, financier and advisor. Atul built a

global distribution system for general aviation and was invited to write

editorial for an edition in Forbes Magazine. Atul has advised several

companies on raising capital and restructuring. Atul has been featured in

many publications such as Businessweek, rediff.com and Entrepreneur.com.

For Asset Management/Wealth Management/Portfolio Management inquiries

anywhere in the global markets, Atul and his team can be contacted on the

following contact details :

Email : [email protected]

Phone : +1 415 513 0026 (US & Worldwide)

+91 9930403019 (Asia Pacific)

Linkedin :

https://www.linkedin.com/in/atul-khekade-9076b36

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Index

1. Introduction

2. Blue-Chip Investing in turbulent times

3. The causes of Exceptional Stock Market returns

a. Price movements of commodities/Raw materials

b. Growth through Franchising

c. Entry of Private Equity/Venture Capital Company

d. Management Restructuring

e. Supply Capacity in strong demand (Strong Macro Factors)

f. Disruptive Product/Technology with household potential

g. The High Risk Derivatives Market

4. Cases of Exceptional Returns

a. Apple Computers

b. Dollar General Corporation

c. Tesla Motors

d. Natural Health Trends

e. Barratt Developments

f. EasyJets

g. McDonalds

h. Starbucks

i. Domino’s Pizza

j. Jubiliant Foodworks

k. TVS Srichakra

l. V2 Retail

m. SpiceJet

n. Amara Raja Batteries

5. Risk Assessment

6. Conclusion

7. Asset Management

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1. Introduction

What made Apple computers stock go from $1 per share in the early 2000 to $95 a share

in 2012?

What made Dominos Pizza stock go from $6 a share in 2009 to $131 a share that it is

today?

What made Tesla Motors stock go from $20 a share to $200 a share in 6 years?

What made TVS Srichakra stock go from Rs. 160 ($2.39) per share in 2013 to Rs.

2800($42) per share in 2015?

Wasn’t the market volatile in those times? Wasn’t the fear of weak global

economy looming all over during this period?

In spite of all the economic factors and turbulent times, how did these stocks manage

to achieve exceptional gains?

We have tried to study the cases of exceptional stock price movements in the past 10-15

years and relate it to a pattern of macro and micro scenarios and decisions.

It is very interesting to note that the history and the patterns keep repeating itself. A

continuous study of these patterns may provide a secret key to finding the opportunities

for exceptional returns in the stock market during the turbulent times.

An average investor is generally exposed to the news and media to such an extent that

it gets difficult to identify these patterns among the constant display of illusion. These

days, the news alerts constantly pop on the Smartphone screens. So the individual is

only like to follow the wave than to predict and encash from it.

Success in stock market investments is a lifetime effort and no one can ever achieve it

as a goal. It is more of a journey or a process. The volatility of the markets keeps certain

risks widely exposed. However, the liquidity that these markets provide, can’t be

matched any other medium of investment. Analyzing and searching case based patterns

of exceptional returns in the past can help an investor identify cases that can fetch

similar returns in the future.

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2. Blue-Chip Investing in Turbulent Times

Most people invest in blue-chips as everyone feels it’s a safe bet. Well, it

definitely is most of the times. But looking at the volatility of global markets, the

age old theory of investing may not work in the current times.

Age Old Theory :

Buy �� Hold

With the volatility of the markets , earning money from Bluechip stocks has

become a game of trading in cycles. Stocks with good dividend payouts are the

ones where one can stay invested. But looking at the market volatility, the new

mantra for fetching returns from Blue-chips stocks has definitely changed.

New Theory in Volatile markets:

Buy ��Hold ��Sell��Hold

Image Source: Heiken Ashi

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So why is this happening?

Well, primarily because of the following factors:

• Incremental use and disruption in Technology for the way we do our everyday

jobs

• Sharp Commodity Price movements

• Major shift of trends e.g. conventional energy to green energy

• Growing Concern about carbon emissions and Environment

• The growth of media, news and smartphones

What used to be steady growth blue-chips in the traditional markets have found it

tougher to maintain growth in the turbulent times.

e.g. If we look at Volkswagen Share Price movement in the last 1 year

$245 in 2015 March �� $116 in 2016

So if you would have bought a Volkswagen stock with your hard earned money back in

2015 just because it was a blue-chip, it would have nearly halved your money by now.

The simple problem is that the too big to fail theory does not work anymore. The bigger

the company gets, the more it gets exposed to the wide array of problems that can

bring it down. For Volkswagen, the problems are emissions scandal, hence there was a

massive drop. But you can look into stock price movement of BMW or Daimler AG or

any major blue-chip, you can see almost a 20-40% drop in its prices.

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3. The Causes of Exceptional Stock Market Returns

Our analysis to study micro and macro factors of the companies that have fetched

exceptional returns has indicated a particular combination of decisions and economic

scenarios. Time and over again these combinations have given similar outcomes in most

of the cases. Although there are nearly 100s of such combinations, looking at the scope

of this paper to introduce these to an investor, we have tried to cover only a few.

a. Price Movements of Commodities/Raw Materials

What are the major expenses in manufacturing business? The cost of raw

materials. Commodity prices are said to have followed a cycle of ups and downs

historically. From 2013-14, the commodity and raw materials prices have taken a

downfall. The reverse trend in prices of commodities as raw materials has turned the

trend for many businesses.

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It is not a rocket science that with cost of raw materials, profits of the companies start

reflecting it after one or two quarters.

Business Profitability

Refer to 4.f, 4.m and 4.k

b. Growth through Franchising

In spite of difference in skin color, religion, languages and races in humans, the

basic needs and likes are the same. This is the reason why a business doing

exceptionally well in one geography or city does well in rest of the world.

Franchisable businesses are those whose processes are driven by strong intellectual

property and it is very easy to scale up the business by opening a new outlet. The staff

can also be very easily trained for the new outlet.

Hence, for a business undergoing a rapid franchise growth, its balance sheets keep on

getting bigger and better. As the outlets of the business keep on growing, the revenues

and profits grow with the same pattern.

c. Entry of Private Equity/Venture capital companies

Venture capital and Private Equity companies specifically look for 2 kinds of

opportunities:

1. Growth Investing

2. Business Restructuring

As everyone knows the VC and PE funds work on a time horizon of delivering certain

minimum returns to the funds they raise capital from. While VC companies are more

growth investors, private equity companies

problems and fix the problems. In both cases there is a significant improvement in the

performance of the companies that they invest in.

When a business keeps running for several years by the same set of people, the

attachment or too much familiarity of the business makes the management overlook

the following factors:

a. New areas/avenues for growth

b. Measures of Cost Reduction

c. Business Efficiency

Refer to 4.g, 4.h, 4.i and 4.j

Entry of Private Equity/Venture capital companies


Business Restructuring



growth investors, private equity companies typically enter a large business with


performance of the companies that they invest in.



New areas/avenues for growth

Measures of Cost Reduction

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typically enter a large business with




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Private equity players typically conduct a significant research on micro and macro

factors before entering into a company. When they enter, they usually undertake major

cost reduction and take up activities to enhance company’s revenues. The horizon of

private equity turnaround is typically between 3 to 7 years. Naturally, the company

becomes much more valuable once the private equity or Venture Capital Company

enters the business.

Refer to 4.b,4.i,4.l and 4.n

d. Management restructuring

When a company restructures its management to add personnel having prior and

proven experience of solving the same set of problems previously, it is most likely

to perform better in the coming times.

Refer to 4.a and 4.m

e. Quality Product supply Capacity in strong demand (Favorable Macro

factors)

Everyone knows the theory of supply and demand. One of the easiest matrixes to

calculate is the supply capacity of the business for a product/service that has a very

clear demand. It also matters whether the market for the product is big enough so that

the entire supply available today or to be produced in the future still falls short of the

demand.

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f. Disruptive Product/Technology with household potential

A company which has produced an intellectual property to supply disruptive

product in a vast and growing demand market generally finds an uptrend. The

product or technology which is so disruptive that it is the only company in it’s

space and has proven initial profitability. It also matters whether the consumer

demand for the disruptive product is growing rapidly as well.

Disruptive products generally have a very high entry barrier. i.e. it is not very easy

to become the company’s competitor. The company also needs to demonstrate

an ability for it’s product to create it’s own demand.

g. The High Risk Derivatives Market

Derivatives market follows a highly volatile yet linear path based on the index or

stock price movement for which they are traded.

Warren buffet has quoted derivatives as “

destructions”

The derivatives have the capacity to make or wipe out the

While the derivatives option is considered highly risky, the fact that it can grow many

fold and follows a linear growth with the index can make it a tool for a calculated

risk.

One of the consistent patterns of the index is to oversell before

announcement or strategic decision at a global level. This overselling comes from

uncertainty or fear from the economic policy.

However, the fact that the policy announcements are made based on a strong

current and historic data related to

bounce back in index post the policy announcements.

The High Risk Derivatives Market

llows a highly volatile yet linear path based on the index or

for which they are traded.

Warren buffet has quoted derivatives as “The Financial weapons of Mass

The derivatives have the capacity to make or wipe out the fortunes.



One of the consistent patterns of the index is to oversell before a major policy


uncertainty or fear from the economic policy.


current and historic data related to jobs, production and inflation generally leads to a

back in index post the policy announcements.

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llows a highly volatile yet linear path based on the index or

The Financial weapons of Mass



a major policy



jobs, production and inflation generally leads to a

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4. Cases of Exceptional Returns

a. Apple computers (NASDAQ: AAPL)

$1 in 2002 �� $100 in 2013

Major Micro and Micro Factors :

• Return of Steve Jobs in 1997 (Management Restructuring)

• Strong Demand in Laptop, smartphones and tab devices market

• Disruptive designs of i-phones, ipads and macbook with household potential

b. Dollar General Corporation (NYSE: DG)

$18 in 2010 �� $85 in 2016

Major Micro and Macro Factors :

• Buyout by TPG Private Equity

• Strong Growth through Franchising

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c. Tesla Motors (NASDAQ: TSLA)

$20 in 2013 �� $250 in 2015

Major Micro and Macro Factors :

• Disruption in Automobile industry with battery powered cars

• Government Financing and support for Green Energy and emission-less drive

d. Natural Health Trends (NASDAQ: NHTC)

$ 0.95 in 2013 �� $51 in 2015

Major Micro and Macro factors:

• Strong demand in beauty products market

• Growth through Franchising and direct sales across 40 nations

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e. Barratt Developments (LON: BDEV)

$110 in 2010 �� $581 in 2016

Major Micro and Macro Factors:

• Strong Real Estate demand in UK due to shortage of land

• Strong supply of developments in the market

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f. EasyJets(LON: EZJ)

$345 in 2011 �� $1915 in 2015

Major Micro and Macro Factors:

• Strong Passenger growth in Aviation

• Fall in Oil Prices boosts profitability

• Supply of Travel add-on products e.g. hotels, cars, holidays

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g. Mcdonalds (NYSE: MCD)

$13 in 2003 �� $123 in 2016

Strong Micro and Macro Factors:

1. Steady demand in Organized and Fast Food

2. Easy supply of organized and retail spaces

3. Strong Growth through Franchising over 36,000 outlets worldwide

h. Starbucks (NASDAQ: SBUX)

$17 in 2011 �� $62 in 2015


1. Steady demand in Organized Coffee Spaces



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i. Dominos Pizza (NYSE: DPZ)

$3 in 2008 �� $131 in 2016


1. Steady demand in Organized and Fast Food



4. Bought by Bain Capital, a Private Equity company in 1998

j. Jubiliant Foodworks (NSE: JUBLFOOD)

Rs. 227 in 2010 �� Rs. 1915 in 2015


1. Manages Dominos Pizza Franchise Stores in India


3. Strong Growth through Franchising over 1000 outlets in India

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k. TVS Sricharka (NSE: TVSSRICHAK)

Rs. 180 in 2013 �� Rs. 3000 in 2015


1. Fall of Rubber Prices from 2011

2. Strong growth of Passenger Cars in India hence strong demand for tyres

Rubber Prices Chart

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l. V2Retail (NSE: V2RETAIL)

Rs. 6 in 2013 �� Rs. 70 in 2015


1. Steady demand in Organized Retail


3. Strong Growth through Franchising

4. Bought by TPG Capital, a Private Equity company in 2011

m. Spicejet (BOM: 500285)

Rs. 12 in 2014 �� Rs. 70 in 2015


1. Strong Demand in Aviation Passenger Market

2. Drop in Oil Prices

3. Return of company’s original promoter Ajay Singh (Management Restructuring)

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n. Amar Raja Batteries (NSE: AMARAJABAT)

Rs. 200 in 2011 �� Rs. 1000 in 2015


1. Strong Demand in Passenger cars Market

2. Sequoia Capital buys 1.4% stake in the company in 2011 (growth financing)

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5. Risk Assessment

As written earlier, success in stock market is not final, it is a journey and a

process. What we have tried to cover in this paper are some of the patterns which lead

to exceptional returns. There are plenty of more cases which would need further study.

Before going ahead with any investment, there is a substantial SWOT Analysis required

that leads to whether or not a company is a good potential investment in spite of

potential patterns for success.

There are various factors for which the company needs to be analyzed before making an

investment. Such as :

a. Price to Earnings Ratio

b. Price to Equity Ratio

c. Debt to equity Ratio

d. Dividend Yield

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6. Conclusion

What is a Good investment Return? 2 times? 4 times ? 10 times? The more the better?

Ideally, a good return on investment is something which outperforms the market,

inflation and increases the value of your money so as to realize you more buying power

than the one you originally had. The equity markets and economic conditions have

become so dynamic that for an investor who is looking to stay ahead of the market, it is

important to constantly look back in time and connect the dots.

7. Asset Management

For Asset Management/Wealth Management/Portfolio Management inquiries

anywhere in the global markets, Atul and his team can be contacted on the

following contact details :

Email : [email protected]

Phone : +1 415 513 0026 (US & Worldwide)

+91 9930403019 (Asia Pacific)

Linkedin :

https://www.linkedin.com/in/atul-khekade-9076b36

exceptional stock market returns in turbulent times

Economy & Finance