How to identify a company with potential for growth? This is a question that every investors wants a definitive answer to. Andrew Stotz, CEO of A. Stotz Investment Research and an award-winning financial analyst with 20 years of experience at various investment banks, will try to answer this and several other questions at a financial modeling and valuation workshop being organised by VCCircle Training in Mumbai on April 26. Ahead of the workshop, in an interview with VCCircle, he speaks of why he stays away from banking stocks, what ails the Indian market and, why he finds the Chinese stock market interesting. He also has a word of caution for those taking the entrepreneurial path. Excerpts:
How did your entrepreneurial journey begin and what brought you to Asia from the US?
I first came to Thailand on a tour and fell in love with the country. So after my MBA and working with Pepsi in the US, I came back to Thailand to teach finance. However, after a year of full-time teaching I realised I am not going to make any money. That was in 1993 when the stock market was booming, so I became a financial analyst.
My entrepreneurial journey began when my best friend Dale Lee came to visit me from the US. He saw there was only instant coffee and there wasn't much fresh coffee here. That is how the idea to start a coffee roasting factory germinated. I had cash then as I was making a lot of money in the stock market and he had passion. This business -- CoffeeWORKS Co Ltd -- turned 20 years last year.
You have also been taking a lot of interest in China vis-à-vis other Asian countries. What are the reasons?
Thailand is where I got my start in Asia. The interesting stock market in China and the opportunity to do a PhD, which I did in three years in my free time, basically, is what attracted me to the country.
What is your take on the Indian market?
The Indian market has a problem. When I look at a stock market I want to make sure that the stocks are investable. In India, about 90 per cent of the 3,000 stocks are family owned so when I do a composite score of size and volume what I find is that 90 per cent of Indian stocks are either small or illiquid. In comparison, 90 per cent of the Chinese stocks are large and liquid. That means that in India there are only 300 really investible stocks for most institutional investors. This is a tiny market. Thailand has almost equal number of investible stocks as India despite the fact that the country has only 500 stocks and this, in itself, speaks of the problem. Thia is the dilemma I face in India and solving it is very difficult.
What is your view on the comparisons drawn between India and China?
If India can unlock those 90 per cent of the stocks there is a great opportunity for India to become a relevant market in the world. If India does not do anything about it then it will be hard for its stock market to be more relevant than China. China has a $4 trillion stock market size. The number of listed stocks in China is going to go past the US in, probably, four years. The big challenge, however, for the Chinese government will be to really decide on how to handle it.
Besides, people are concerned about the Chinese government's intervention in the market while the regulators are having a hard time handling the falling market. In India there is more trust in the regulator compared to China. The other thing is that China is trading on PE (price-to-earnings ratio) of 20 times and when you exclude the banking sector, China is not cheap. India is not cheap either. But sometimes when you have banks constituting 35 per cent of the Chinese market that is trading on PE of six times then that is going to hold back the Chinese market as banks have a serious issue. On this front, India has an opportunity from the stock market perspective.
In a recent interview, you said those wanting to invest in China must stay away from financials. Instead, they should look at interesting companies. Is that an advice specifically for China or for all markets in general? Besides, how does one define “interesting”?
Basically, my investment style is I don't invest in banks. The problem with them is they are the instruments of the government. To understand a banks' performance is to understand a government's desire and my ability to understand a government's desire is minimal. Banks are also regulated a lot. Besides, banking is a commodity business so if one bank comes up with a credit card or a new idea another bank will figure that out within six months and come up with a same product. These factors make you think that you want to invest in entrepreneurial initiatives, in startups and in young companies that can grow 10 times their size over the years.
So does "interesting" mean startups to you?
Startups is one part. The problem with them is that the failing rate among them is enormous. So you don't want to put all your money in a startup. In a listed company you know you have an established company. In my investment I look at a combination. I like to do startups because I have been involved in it before but they are highly risky and therefore the combination.
So what does "interesting" actually mean to you?
First of all, to me banks are not interesting. What am I looking for when I am scouting for interesting companies is profitable growth. I don't want a company which is highly profitable but with low growth and I don't want a company with high growth and low profitability. So part of what we are teaching in the seminar coming in India is the way I look at profitable growth, the way I calculate it and the way I assess it. That is what I call fundamentals. Then I look at the valuation of the company and then at momentum and then finally at risk. This FVM framework is the way I look at every company, whether it is a startup or an established company.
What is your advice to young entrepreneurs wanting to chart out a journey of their own?
My first advise is don't do it because you will fail. However, I know entrepreneurs will not listen to it. Many people talk about exciting prospects when they begin. That is a lie and the reality is extremely tough. So if you start with the knowledge that the odds are stacked against you, it will change the way you go ahead. When I look at investments in an entrepreneurial venture I consider three things -- do I trust the entrepreneur; is the idea good; and can the entrepreneur implement the idea.