Did you give these stocks a miss? - Views on News from Equitymaster

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Did you give these stocks a miss?

Jan 3, 2011

In our earlier article we focused on the 5 top performing stocks of 2010. With the Sensex once again reaching its previous peaks, it is not surprising that some of these blue chips would ride the wave. Auto and Banking and Pharma stocks saw a strong comeback. Well, that was focusing on the good part. Now, we will turn to look at the bad and the ugly. These stocks are the 5 worst performers from our universe of BSE-100 companies in 2010. Some of these stocks halved, while the others also lost significant ground. Letís now see which stocks you were better off staying more than a mile away from.
HDIL (Returns in - 2009: 178%, 2010: -46%) and Indiabulls Real Estate (Returns in - 2009: 73%, 2010: -39%):

Data Source: CMIE Prowess

It is a known fact that the real estate developers stretched their arms beyond their means during the real estate boom. In the greed to acquire land bank majority of the developers leveraged their balance sheet as if there was no tomorrow. There was a sense that these developers would face the heat once the debt payments were to come due as rising property prices had paralyzed sales and thus the cash flow to meet the repayment commitments.

But the stock prices were telling a different story. However, this did not prevail for long as sanity returned to the markets. Concerns with respect to debt repayment and possibility of rising interest rates took a toll on the real estate stocks. This can be seen in the stock price performance of HDIL and Indiabulls Real Estate both down 46% and 39% respectively. Others players including IVRCL, Unitech and DLF were also down over 20% YoY. Rising interest rates is likely to hurt residential demand as home loan rates are expected to go up significantly. It is interesting to note that despite realty prices showing no signs of correction the respective stock prices have underperformed the broader market. Apart from the reasons highlighted above we think it is the sustainability of the higher realty prices that has worried the markets and led to a free fall in stock prices.

Suzlon: (Returns in - 2009: 45%, 2010:-41%)

Data Source: CMIE Prowess

Suzlon continued its poor performance in 2010. Sales declined by 31% during 1HFY11. It reported an operating loss of Rs 4.5 bn during 1HFY11 as against an operating profit of Rs 0.7 bn in the corresponding period previous fiscal. Suzlon is one of the worst performing stocks of 2010. Its performance has been on a downward spiral since its wind-power business started breaking down in 2008. Customer complaints piled on and some of them even cancelled ongoing contracts. The balance sheet was leveraged, cash flows dwindled and losses widened. Overall, its financial position went from bad to worse.

However, in Q2FY11 the company reported positive operating margins. The wind turbine business surprised us with an operating margin of 5.1% for Q2FY11. But it still remained in red at the net profit level. Huge fixed costs and interest costs continue to be a drag on its earnings.

Welspun Corp: (Returns in - 2009: 147%, 2010:-37%)

Welspun Corp is one of the largest producers of large diameter line pipes in the world. It has a capacity of nearly 2.0 m MTPA. But, its promoters seemed to be more focused on rigging stock prices rather than its business prospects. Post the unearthing of the bribe-for-loans scam, 2G scam etc, SEBI accused the promoters of some mid-cap companies of rigging their share prices. The accusation ran that promoters of companies like Ackruti City, Welspun, Murli Industries etc colluded with certain unscrupulous market participants. Prices of their shares were ramped up prior to raising capital in the period between 2006 and 2009. This was done either before raising money through FCCBs or QIPs. Welspun Corpís promoters were subsequently barred from participating in capital markets. The stock crashed 27% post this sizzling piece of news on December 3rd 2010. The promoters of the company are now planning to contest SEBIís claim. They strongly deny any impact on the companyís financial performance. But, with the stock down 37% YTD, the markets still arenít done punishing the scrip.

Data Source: CMIE Prowess

NMDC: (Returns in - 2009: 156%, 2010:-34%)

NMDC is an entrenched player in the Indian iron ore mining sector, being the largest player. It is involved in the exploration of wide range of minerals including iron ore, copper, rock phosphate, lime stone, diamonds, etc. The company had an FPO in 2010, with the government divesting 8.4%. This issue was fully subscribed just by the skin of its teeth. It was more or less shunned by investors as it was overpriced. Finally the new shares listed at the lower end of the FPO price band in March. This was a curious FPO, as previously the public float was just 1.6%, making the stock valuations much higher, than fundamentals. Post NMDCís high in the beginning of Jan 2010, the shares saw a big dip thereafter and never really recovered since. In 1HFY11, the company was able to post higher revenues and profits on higher realizations. But, volumes were down and the monsoon season and ban on iron sales in Karnataka impacted sales. Its stock price continued to tank, as it announced a likely fall in iron ore prices. Naxal and other related issues also forced it to shut mines in Chhattisgarh. Its acquisition of Sponge Iron has not been doing well. It has failed to revive this loss making entity.

Data Source: CMIE Prowess

In conclusion

As you can see from the above analysis, most of these stocks were good performers in 2009. But, they turned out to be duds in 2010. If you had major positions in these stocks they could have wiped out a big chunk of your portfolio. So, it doesnít make any sense for you blindly expect the stocks in your possession to keep rising. You need to take a call based on the current economic scenario. Real estate stocks were a big part of the previous bull run. But, they lost significant shareholder value this time around. Companies with unscrupulous managements also lost out big time.

For 2011, we suggest that you focus on companies with good managements, strong economic fundamentals and minimum regulatory concerns. Also stay within your circle of competence while investing. If you do, you may be able to avoid next yearís biggest wealth destroyers.

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2 Responses to "Did you give these stocks a miss?"

Krishna Kumar

Jan 12, 2011

Why not cover Varun Shipping. This stock is also halved its price. What is the matter with this company. Does anyone smell something fishy?



Jan 5, 2011

Scandal investing is an art and we need to thank Indian markets for throwing up scandals at regular intervals. While the blame for these lies with the promoters for their illegal activities, sometimes the market punishes the scrips more than warranted, giving the contrarian investors golden opportunities. For example, I bought into Welspun during the recent crash at 155 and currently sitting on good profits...expect the stock to touch 200 within a short time. Similarly, stocks that have good run-up in the recent times such as banking/metals etc should be given a miss/sold as they are likely to underperform this year.

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