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Rethinking Dead Monk’s Portfolio – Part 2

We are in process of making an annual assessment of our Dead Monk’s Portfolio. In our last post, we tried to questioning portfolio structure. We eventually arrived at a conclusion that Core-Satellite structure has worked for us and we are going to stick with it. But we have made slight adjustments to it. We now have a simpler SATELLITE structure. For more details about the new modified portfolio structure, please refer to this.


Do we need more dividend stocks?

In previous post, we mentioned that we might need to find new dividend stocks for the CORE of the portfolio. This was to stay prepared for possible exits from existing positions and to maintain the dividend income levels from the portfolio. We are almost through with our stock selection and we feel that inclusion of new dividend stocks may not be necessary at present. Reason? Apart from 5 stocks which will form our dividend core, the stocks forming part of the Large Cap Satellite themselves have decent dividend yields. Add to this the fact that a pick in Growth Oriented Satellite comes from energy sector and has recently announced a promising dividend policy.

We have chosen 13 stocks for DMP. Out of these 8 stocks have a known history of paying generous dividends to the shareholders.

dividend history
Dividend History
Do we need to have stocks from every sector?

The answer is a big NO!! The chosen 13 stocks belong to just 4 sectors. These are sectors and industries which we are comfortable with.

Energy – 4 companies
Chemicals – 1 company
Financials – 4 companies
FMCG – 2 companies
Others – 2 companies

sector allocation in stock portfolio
Sector Allocation
At present, we are not very comfortable with FMCG sector valuations. But we have still chosen 2 stocks from this sector because this is a portfolio, which can be kept for years, if not decades. But we do believe that currently, FMCG stocks are good businessesto buy, but not at current valuations.

Another thought which bothered us was that we regularly come out with list of stocks like 10 Stocks to buy in next market corrections & 13 Great Indian businesses. Wouldn’t it be a wise idea to have a few of those stocks in this portfolio? This concern has been addressed in the new portfolio and a number of stocks from these lists have found their way to Dead Monk’s Portfolio. 🙂

We have intentionally not chosen specific stocks for cyclical section of the portfolio because these stocks would be bought and sold at regular intervals. We do not plan to hold them for decades at a stretch.

We would share the portfolio composition in our next post.

Dead Monk’s Disclaimer – As an investor, we can never eliminate the risk of being wrong.

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Hindustan Unilever Ltd (HUL): A good business is not always a good stock

HUL is an example of a great business. It has a portfolio of famous FMCG brands that every Indian uses atleast once a day. Who wouldn’t recognize Lux, Lifebouy, Kissan, Rin, Surf, Axe, Close Up, Dove, Fair & Lovely, Sunsilk or other HUL brands? With Indian growth driven primarily by domestic consumption, there is no question whether HUL, with all its powerful brands, is well positioned to take advantage of this growth or not. Even respected stock research houses are claiming that ‘HUL is on a path of sustainable growth with the help of its powerful & diversified brands and thus they maintain a Buy rating on the Stock once again.’


HUL Hindustan Unilever Limted
HUL – A good buy?
But we beg to differ from everyone here. We are not convinced that HUL is a good BUY at this price. With HUL at Rs 530, there are some facts which suggest that it may not be the best time to buy this stock:
  • HUL is commanding a P/Emultiple of 50. This is highest multiple it has ever commanded. FMCG companies generally trade at high PE multiples. But a PE=50, doesn’t seem sustainable.
  • With a 3 year growth rate of 4.63% in Sales & 2.02% in Profits, a P/E of 50 does seem irrational.
  • If we check HUL’s PEG Ratio with Current PE=50 & G=15% (though past records stands at less than 5%), we get a PEG=3.33. And a stock having PEG>1 is considered to be overvalued.
  • Another way of looking at PE=50 is that investors expect HUL to grow at 50% per year in future. And common sense says that this is insane. With a company of HUL’s size, a 50% growth rate is like Elephant running at 300kmph!! 🙂

So what are your views?

Disclosures: No Positions in HUL. But if we had already purchased HUL years ago and had big capital gains built into the stock, we wouldn’t sell it even if it was overvalued. This is because we believe in power of doing nothing in stock markets. 🙂

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