The key factor for identifying multi-baggers

Jun 12, 2014

In this issue:
» Major disconnect between realty volumes & stock prices.
» The leadership saga at Infosys finally comes to an end.
» ICICI Bank's cost rationalization efforts.
» Mark Mobius likes the reform driven EMs.
» ...and more!

Last week, we had gone through the list of top performing stocks in the market run up in recent weeks. One thing we learnt was that the speculation levels seem to be running high as the common trait in most of the top performing companies was their not so great financial conditions. In other words, high expectations of turnaround in fortunes are being factored in present times.

This week we'll take things in another direction...

It would not be wrong in saying that as long term investors, we are in constant search for multi-baggers. And what better way to learn than looking at the best performing stocks from the peak of the market run up till mid-January 2008; a time when the BSE-Sensex had touched its all time high level then; a time when the index's valuations was at unrealistic levels; a time when smallcaps and midcaps were doubling every few weeks in the months running up to the market peak. In other words, the markets were euphoric and stocks across the board were trading very expensive.

We have come a long way since. And yet, there are many stocks that have not even come close to all time highs that were touched in the first half of January 2008. And then there are others that have pretty much killed it!

The interesting bit is that out of the 180 stocks that were part of the BSE-200 Index then and now, only about 68% are currently trading at similar levels or higher than their 8th January 2008 prices (the date when the index closed at its highest level then); not necessarily the respective peak levels of each stock as we have taken this date which was when the Sensex touched its peak.

The following is the list of the best performing stocks since January 08, 2008:

Top performing stocks
1TTK Prestige Ltd.1758%
2Eicher Motors Ltd.1681%
3Page Industries Ltd.1143%
4Vakrangee Ltd.1068%
5Gruh Finance Ltd.849%
6Lupin Ltd.704%
7Supreme Industries Ltd.610%
8Amara Raja Batteries Ltd.601%
9Torrent Pharmaceuticals Ltd.575%
10Aurobindo Pharma Ltd.560%
Data Source: ACE Equity; *since 8th January 2008

...and following is the list of the worst performing stocks since then.

Worst performing stocks
1Unitech Ltd.-94%
2Housing Development & Infrastructure Ltd.-89%
3Indiabulls Real Estate Ltd.-87%
4TV18 Broadcast Ltd.-83%
5Jaiprakash Power Ventures Ltd.-83%
6Reliance Communications Ltd.-82%
7DLF Ltd.-81%
8Hindustan Copper Ltd.-79%
9Reliance Capital Ltd.-77%
10Jaiprakash Associates Ltd.-73%
Data Source: ACE Equity; *since 8th January 2008

Glancing through these lists, all we can say is that over the long term, quality matters. For remaining invested for long periods, it goes without saying that one should not compromise on factors that make up a high quality company. It may be noted that the stocks that were seemingly trading expensive at the start of 2008 have still done well due to the same aspect - that of being high quality businesses.

Alternatively, one could think of it this way. For a stock that is down 70%, 80% or 90% from one's purchase price, it would have to rise by 3.3, 5 and 10 times respectively to get back to the purchase price itself. And even if they do rise up so sharply, the investor would have just broken even.

We believe this gives a good learning that not all largecap stocks are winners over the long term. And that it would be best for investors to stick to taking a bottom-up approach when identifying stocks. This would also hold true for sectors that are witnessing strong tailwinds - something that investors could relate to given the market run up in stocks from selected sectors in the five year period ending 2008.

What are the key aspects you look for in companies when attempting to identify potential multi-baggers over the long term? Let us know in the Equitymaster Club or share your comments below.

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Given the number of homeless in India today, giving every family a pucca house over the next 8-10 years will require an effort beyond mammoth we believe. In fact, if we are able to fulfill even a fraction of this, we will happily take it. But there's a still a huge gap between the cup and the lip. Right now, it's just the vision that has been outlined. And given how cash starved the Government is, the very mooting of this idea is indeed bold according to us. However, investors take this promise by the Indian Prime Minister as the gospel truth at their own peril. The plan is going to be met by hurdles at every step of the way we reckon. And therefore, investing in companies just because of expectations of a lot of houses being built over the next many years may not be the right approach for a long term investor. Therefore, unless there's some concrete action on this front and unless the companies concerned don't see a dramatic turnaround in fortunes, it's better to stay away from them. We know that the companies could run up and offer no upside by the time there's tangible evidence of growth. However, investing is not done in companies where most of the growth is already priced in. It's usually done when the market assumes that there's no growth left in a stock.

 Chart of the day
Here's evidence of there surely being a major disconnect between the on ground reality in property market and the way stock prices of such companies are moving. The property market is in a downturn due to falling demand. As such, the absorption rates have fallen. However, on the other hand the stock prices of realty companies have sky rocketed especially in the last one month evident from the 64% gain the BSE Realty index. Thus, there seems to be a missing link between the two. Not only now, such a contrast was also evident in the past. The only difference then was at that time property prices were increasing but stock prices were falling. Today's chart of the day indicates the change in absorption rates across key markets on a YoY basis.

Realty volumes decline across key markets on a YoY basis

The question is why this disparity exists. The answer is quite evident. High growth expectations! Further, there is a belief that liquidity will flow into the sector, which would reduce borrowing costs of developers and increase their earnings and thus their stock prices. The affordability factor will also rise if the economy recovers and disposable income rises. This again is beneficial to the industry in general as stability in income gives confidence to buyers in order to lever a property transaction.

Nevertheless, while the opportunities look very bright for the realty space, it would be best for investors to take cautious approach given the very high expectations built up in the form of the sharp run up in realty stocks in recent times.

The leadership saga at Infosys has finally come to an end. This morning, India's second largest IT firm appointed a new Chief Executive Officer (CEO), Dr. Vishal Sikka. He will take over from S.D Shibulal on 1st August and will be the first non-founder to lead the company. Dr. Sikka was formerly Chief Technology Officer (CTO) and board member at SAP. Bringing in a CEO from outside the firm was a much needed move but of equal importance we believe was the announcement that co-founders, N.R Narayana Murthy and S Gopalakrishnan, will step down from their leadership roles as well. This will give the new CEO a free hand to run the company.

With the leadership and succession planning issues now resolved, the focus will shift to the performance of the business. In the long term, only the fundamentals of the business can drive the stock price and this will hold true with Infosys as well. It must also be pointed out that the company is sitting on a large cash hoard. We believe that it is imperative for the new leadership to draw out a clear plan for this cash. The company's business model is asset light. Thus it will be prudent for Infosys to use the excess cash on its balance sheet to reward shareholders by means of a share buyback or a special dividend.

Most private sector banks may have not had to contend with the problem of loan write-offs in the past year. However, the problem of rising overheads has certainly threatened their profitability. And since employee cost is the major cost head, banks have got increasingly cautious about hiring plans. Moreover with new entrants in the sector, the cost of hiring and retaining employees is also expected to move up. Except for HDFC Bank which saw its employee count decline by 900, the other five top private sector banks together added 20,000 on their payrolls in FY14.With over 70,000 employees ICICI Bank was in fact the biggest employers in the private sector. However, ICICI Bank's latest decision to lay off 1,200 employees can be seen in the light of cost rationalization efforts. The bank has had the problem of above average cost to income ratio in the past. Therefore not being able to rein in its operating efficiency this time around could hurt the bank's relatively weak return ratios.

Emerging markets once again seem to be catching the investor's eye. And it is Mark Mobius now who opines that the outlook indeed is looking bright for these countries. One of the key reasons for this is the focus of governments on reform. Let's take India for instance. While the erstwhile UPA government faced a lot of flak for its lack of policy making, the Modi government coming into power has fueled hopes of development and reforming taking off. Mobius has also highlighted examples of China and Indonesia looking to undertake extensive reforms. Thus, he believes that the reform outlook in the EMs is the brightest in years. The outlook for these countries at present is also much better than what it was around 20 years back. This is on account of rise in per capita incomes and the fact that these countries are now much more integrated into the global economy. Basically, from a longer term perspective EMs are expected to grow faster than their developed peers. And the focus on reforms is certainly very encouraging. What will be important though is how each of these countries is able to effectively implement the reforms that they outline.

The Indian stock markets continued to firm up. At the time of writing, the benchmark BSE-Sensex was up by 100 points (up 0.4 %). Barring IT, all sectoral indices were trading in the green. Realty and metal stocks were the biggest gainers on the bourses today. Asian stock markets were trading weak with Indonesia and Japan being the biggest losers. European markets have also opened the day on a weak note.

 Today's investing mantra
Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes. - George Soros

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1 Responses to "The key factor for identifying multi-baggers"

Balachandran Ramamurthi

Jun 13, 2014

"In other words, the markets were euphoric and stocks across the board were trading very expensive."
Though you were referring to 2008 scenario, I am afraid whether we ARE currently also in a similar situation, may be a shade better (thanks to the attitude of once bitten twice shy). As written earlier in your in one of columns, many brokerages appear to be interested only to the extent of their bonuses and incentives. Your articles on Japan and the Indian realty sector should be eye openers.. Regards

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