Range Watch - Indian Technology Services
Infosys has been one of our big winners in 2013. We initially entered the position on December 7th, 2012 at $42.75 and exited after a quick run up at the end of January, logging a 21.6% return. At the time of entry, the market had discounted Infosys earnings power driving the stock to the low valuation in the period after the US elections and in the few weeks before earnings in January. When the company beat lowered expectations, the subsequent rising tide was pronounced. Since INFY does not pay a dividend and as a 'growth' stock is susceptible to quick course corrections, we exited quickly. That volatility was felt this week as on the back of heightened expectations, the company issued disappointing quarterly results and forecast - sending the stock down over 20% to just above our entry price. We are taking a cautionary stance on the Indian Technology Services sector and lowering valuation ranges as you see in the table below. This example highlights a few of the tenets of the Purple Chips model in action:
[PostStockWidget stock_valuation="" pricetype="live" manual_date="Dec. 21, 2012, 2:04pm GMT" symbolcodes="'INFY','WIT'" symbolprices="45,8" div_align="right"]
Purple Chips methodology cycles from higher risk, lower quality positions into lower risk, higher quality - It is this cycle that continues to improve the overall current quality and accelerate returns.
Buying high quality companies at historically low valuations can insulate against market volatility - we purchase at $42.75, had we not sold the position in January and instead held the stock, we would be down, but still making money on the position even after Friday's bloodbath.
Don't fall in love with the stock, focus on the total compound return - We may issue another alert in INFY in the future, but at this moment we will stand aside and wait. After we exited INFY, we applied the funds and twenty percent gain to a new position in DollarTree (DLTR) which we recently exited with an additional 15% total return. The compound return at lower risk is better for overall portfolio health!
Following further earnings decline, the range on INFY has been decreased to LO 35 and HI 54 as of 04/24/13.