Should you be Investing in Holding Companies?
While investing we often seek for higher profits and therefore as an investor, we give most of our time in search for undervalued stocks. Today, I come up with one of such themes where we can find our bargains. “Holding Companies”, the beauty of these companies is that they trade at 50%-70% discount than they are actually worth, anything more than that is actually worth looking for. But everything comes with a price, not all holding companies worth investing.
Why so? We have to understand there are two types of holding companies 1) Those which has their own businesses and also holds some underlying, and 2) They do not carry on any business but they hold stake in other companies, these types of holding companies commonly known to be NBFC’s.
As an investor when we invest in this kind of theme, we invest with the hope of value unlocking. In other words, either we have to ensure that underlying which these companies are holding are strong businesses and you are absolutely bullish about it, developments in these underlying may narrow the valuation gap, thus bringing profit on the table, or promoters may dilute the company and the real value will be paid of to the shareholders in way of buyback, etc.
What to look before investing in these kinds of companies?
There are few aspects worth looking for before you invest in,
1) Ensure the underlying businesses are strong and you are bullish about it.
2) Look for cash flow which arises thorough dividends of companies and allocation of those cash paid out as dividend, the cash paid out as dividends commonly
are used in 3 different ways:
The company may re-distribute the dividends to shareholders. (good)
The dividends may be used to re-invest in the underlying’s. (good)
It may be also be used to give advances to its underlying’s. (Worth your attention)
3) Look for their share holdings in the businesses in which you are bullish about.
e.g., Let’s say you are investing in some ‘X’ holding company because it has holdings in some ‘A’ company in which you are bullish about. But company’s holdings in ‘A’ is very little, say 2% and remaining value comes from other underlying in which you are not so bullish or you are neutral about. In such case I do not see any valid point in investing in these companies unless such underlying is very high-quality business and promoters’ holdings is at least 50%.
4) Check for promoters interest, this could be one of the reasons behind value unlocking.
Let’s not continue to make this more complex and un-readable, In the next blog, we will continue with some examples of holding companies and whether or not should you be investing?
Until Next time,
The Humane Opportunist.