Sunil Shah: Analyzing the stock-picking strategy and philosophy of this market expert

The industry veteran is known to be a man with zero tolerance for bad corporate governance.

Sunil Shah, the Co-founder of Turtle Star Portfolio Managers has over 25 years in the field of stock market research and portfolio management. He has worked with ABN AMRO Bank as a portfolio manager and has acted as head of research for Enam Securities in the past. Given his rich experience in research and a professional mindset, let us understand more about his stock-picking strategy and philosophy.

According to Shah, his approach lies in bifurcating companies based on underlying macros that can be key profit drivers. To do this, he applies some key filters to each stock such as sustainable return on equity, low debt to equity, high cash flow from the operation, low working capital, solid sales and profit growth and prudent capital allocation.

Along with these quantifiable factors, he also considers several non-quantifiable factors to judge the quality of a business. This include market feedback on the quality and competence of the management, its track record in bull and bear markets, size of business opportunity, and the company’s willingness and readiness to seize new ones.

In his words, valuation is the mother of all investment rationales. For Shah, the dividend yield is a key parameter to consider when looking at valuation. If a stock is available at an attractive dividend yield, which is close to the risk-free rate of return, it can be safe to initiate a buying decision. The next ratio is the price-to-book value. This provides the cushion to buy a stock at the historical cost of assets. The other critical parameter is the price-to-replacement cost – a ratio that tells you if the assets are available at a bargain. It can largely be applied to cyclical businesses

Shah has made his share of mistakes in his investing career, but the most common element has been to take the management at face value and trust their statements with emotional biases. The inability to decipher corporate governance properly has been his biggest shortcoming in the past. So he believes that if there is even the slightest doubt on corporate governance, one should the matter seriously and, if possible, exit.

In the post-covid world, Sunil Shah sees three themes that have evolved – the first is the increased adoption of IT. In his opinion, the adoption of IT in our life has advanced by at least 4-5 years. The second is the financialisation of savings and the third; PLI or domestic manufacturing of electronics products. He thinks all these three themes have seeds of structural story and have growth possibility in the next few years.