We spotted a “Multi-beggar” stock 3 years back – You can, too!

The earnings power box method offers a simple way to spot stocks that could become anti-mutlibaggers colloquially called multi-beggers well before they fail! Here is an example.

Published: February 17, 2020 at 11:21 am

Yes, you read it right. There is no typographical error in the title. A minor swap of ‘a’ and ‘e’ does make a huge difference. A “multi-beggar stock” is a casual reference to the very opposite of a multibagger stock! R Srivatsan explains how his method to spot bad businesses came good and how you can do it too!

In April 2017, R. Srivatsan (who would like to be referred to as a freefincal reader) explained how you can identify the next “Satyam”. That is, how to differentiate a good business from a bad one, using a stock valuation technique known as Earnings Power Box, introduced by Hewitt Heiserman, Jr, in his book,  “It’s Earnings That Count: Finding Stocks with Earnings Power for Long-Term Profits” (available on Amazon).

Srivatsan then sent me an Earnings power module which is now part of the freefincal automated stock analyzer. Another reader, Lokesh Verma then used this to list 50 stocks with solid earnings power: Ability to self-fund and create value. Later, the analysis spreadsheet was extended to include US stocks which Hewitt Heiserman, Jr was appreciative of (private correspondence).

What is Hewitt Heiserman Jr.’s Earnings Power Box?

This is a plot of two the Defensive EPS (earnings per share) vs Enterprising EPS. The idea is to spot where a company falls in. This is based on the Earnings Power Valuation Model (doc file).


Hewitt Heiserman Jr.’s Earnings Power Box: plot of Defensive EPS (earnings per share) vs Enterprising EPSf

Srivatsan has defined enterprising and defensive EPS as follows: Enterprising EPS = (Enterprising Income)/(Shares Outstanding) and Defensive EPS =  (Defensive Income)/(Shares Outstanding). Therefore:

Enterprising Income = Net Income – (15% x total capital). Here 15% is the weighted average cost of capital (WACC) and is an expected return. Also, 15% x total capital = enterprising interest.

Defensive Income = Free Cash Flow – change in working capital since last FY. Now over to Srivatsan.

Two interesting things happened this week:

  1. Almost 3 years back, I wrote the first draft of Heiserman’s earnings power box article (linked above)
  2. My friend Punith (shout out) sent me the news that Talwalkar’s fitness had gone bankrupt (this is about three months old, but did not see it earlier).

So, what’s the big deal here?
I request the readers to please take a closer look at slides 3, 17 and 18 (reproduced below) from my presentation: It’s Earnings That Count: Can you identify the next Satyam?

slide three: It’s Earnings That Count: Can you identify the next Satyam?

slide 17: It’s Earnings That Count: Can you identify the next Satyam?

slide 18: It’s Earnings That Count: Can you identify the next Satyam?

It was Talwalkars’ wonderful EPS graph that actually started the whole ball (avalanche?) rolling. Talwalkars was the mysterious real company X that resembled an energizer bunny on a treadmill (Kudos to the Holmes/Poirots who figured this red herring clue 🙂 )

Please remember during 2016-2017, to paraphrase Buffett bhakts – this was a dream business with a good moat, good business model (with customers paying upfront as a subscription) and the target segments becoming more and more fitness-obsessed and willing to pay more and more.

Within 2 years of Earnings power box revealing that everything is not hunky-dory; contrary to the financial results and prevailing market sentiment at that time – the company has crashed and burned.

Share price trend - Talwalkars Better value Fitness Ltd
Share price trend – Talwalkars Better value Fitness Ltd – Image Source: www.screener.in

So, this is what I request the readers to think and do:

  1. If your screener throws up a miraculously undervalued, hitting the 52wk lows, a too good to be true stock especially in the current scenario– run it through the earnings power box. If it falls in quadrant 3 – ruthlessly eliminate and move on.
  2. Use this method to review your current direct stock holdings annually (preferably after the annual report comes out) – If any of your stocks have gone into the quadrant 3 – alarm bells should be ringing.
  3. Eliminating a “multi-beggar” is far easier, quicker and takes very little effort and has a greater impact on our portfolio; compared to the time and effort involved in chasing that elusive “multi-bagger”.

“All I want to know is where I’m going to die, so I’ll never go there.” — Charlie Munger

Do share if you found this useful

Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 640 investors and advisors use this!
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 2525 investors and advisors are part of our exclusive Facebook Group! Get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 585 salaried employees, entrepreneurs and financial advisors are part of our exclusive Facebook Group! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts you and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos in an exclusive Facebook Group!   
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored three print books, You can be rich too with goal-based investing (CNBC TV18), Gamechanger, Chinchu Gets a Superpower! and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps