Hits and Misses..2014...NATURALLY...!!!

Our hits and misses of 2014

LOKESHWARRI SK

Stocks we rated ‘buy’ averaged 54 per cent, but some of our ‘hold’ calls were too conservative

It is that time of the year again when we look back at our performance score-card. There was a marked shift in investor sentiment from pessimism to optimism in 2014. As the year unfolded, it became apparent that the economy was on the mend and the positive impact from this could help company fortunes too. The stock market too seemed to have embarked on a multi-year up-move.

But our task of recommending stocks was complicated by two factors. One, as investors took heavy bets on the Modi Government ushering in fast-paced changes, there was a sharp run-up in the prices of many stocks. With little improvement in earnings, valuations became stretched. In many companies it, therefore, was a Hobson’s choice between taking the leap of faith before the numbers began improving or to lose out on a large part of the rally.

Two, the maximum gain in the rally was made in mid- and small-cap stocks. Sifting through the chaff in this space, avoiding companies with governance issues and zeroing in on those that had the potential to grow over the next two to five years was the other challenge.

Since our stock recommendations are given with a two-year horizon, we have considered the calls made between October 2012 and September 2014 for this performance review. Of the total stock recommendations, 58 per cent of the calls (buy, sell and hold) have worked, or have outperformed benchmark returns.

While that is not something to rave about, the average return of the stocks we recommended is 54 per cent, well above the benchmark return of 36 per cent. This is, of course, partly a function of the bull market currently in place.

The buys, the sells and the holds

Our analysts have taken a positive view on the prospects of India Inc and this is reflected in the fact that ‘buy’ recommendations accounted for over 70 per cent of our stock calls given. Around 58 per cent of these recommendations came good. So, where did we fall short? Our bet on PSU companies with monopoly in their segments, such as NMDC, did not deliver. Stocks in the oil and gas sector too have underperformed, thanks to regulatory issues and the adverse commodity cycle. Real estate and aviation stocks did not do too well due to the problems besieging those sectors.

Our portfolio of ‘buy’ recommendations has delivered 54 per cent returns, thanks to our multi-baggers. One-fifth of the stocks where we recommended a ‘buy’ have gained more than 100 per cent. Of these, seven have gained more than 200 per cent. JK Lakshmi Cement is our best pick, with 440 per cent gain. Infrastructure companies such as IRB Infra and Kalpataru Power Transmissions, Amara Raja Batteries and Persistent Systems are among our other top picks.

Since the market was in such a gung-ho mood, only 20 per cent of our calls were ‘sell’ recommendations. Of these calls, 56 per cent worked or managed to under-perform the benchmark. We were able to give some timely exit calls in stocks such as Bhushan Steel and DLF. But some stocks which were recommended for exit have rallied sharply. This resulted in an average return of 31 per cent in these calls against 33 per cent gains of the benchmark. Stocks of FMCG companies that continued to rally despite slowing growth and stiff valuation and some sell calls in auto and auto ancillaries, before the cycle turned for this sector, contributed to this droll situation.

Less that 10 per cent of our calls were ‘hold’ but the fact that this portfolio has gained 50 per cent shows that our cautious stance has made readers forego gains, this is something we need to address next year. That five of the ‘hold’ calls gained more than 100 per cent only accentuates this point.

IPOs, MFs and bonds

There wasn’t too much activity in the primary market in 2014. Our invest call in the IPOs of Wonderla and Snowman Logistics that debuted in the first nine months, has worked. We had also asked readers to book profit in Wonderla in September since the stock price had moved far beyond the stock’s intrinsic worth. Our hit-rate for IPO recommendations given over the last two years is 80 per cent. The advice to invest in tax-free bonds of IRFC, REC, NHB and so on would also have delivered gains as these bonds have rallied in expectation of prospective interest rate cut.

With mutual fund managers finding it easy to beat their benchmarks, our fund calls made between January and October this year enjoyed a hit rate of 94 per cent. The recommendations to ‘buy’ fared better with 97 per cent of our calls beating benchmark returns. Of the calls for selling mutual funds, 60 per cent were right. Returns on the debt funds, suggested for investment, ranged from 13 to 18 per cent, on an annualised basis.

What are the areas we need to work on in 2015? We need to broad-base the universe of stocks that we track. We will try to cover more under-researched stocks that hold value. With most stocks with visibility in earnings growth having already moved higher, this has become an imperative. We will also try and improve our hit-ratio for stock recommendations. We will also continue to cover new offerings in insurance, bonds and fixed deposits, to provide you investment options besides stocks and mutual funds.

(This article was published on December 28, 2014)

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