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India Equity Research Reports, IPO and Stock News
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1,613 stocks have delivered median 18.4% CAGR in price return over the past decade
This implies a realized equity risk premium of 11% on median returns. The common threads for the best performing stocks of the past ten years were: a) they were small – 85% of the bottom quintile delivered better than market returns; b) they benefited from strong earnings growth through a combination of reasonable return on capital and judicious accumulation of capital; c) they had reasonable valuations.
Today’s large-caps may not be tomorrow’s winners
Buying today’s largest-cap stocks does not assure better returns. Ten of the top 20 stocks by market cap in 2002 no longer feature in the list of top 20 companies. The average return from the top 20 stocks in 2002 is 13% – worse than the market median. Eleven of these 20 stocks underperformed the market.
What should we do today?
The key differentiating factor for forward returns is long-term earnings growth and, hence, our difficulty in nailing the list. That said, on page 11, we highlight stocks that meet any of two (valuations, ROE) of the three criteria needed for superior returns from a list of 449 stocks with market cap exceeding US$200 million. Prospects for returns appear only slightly inferior to ten years ago.
The Road to Wealth Creation: The Formula = GARP (Growth At a Reasonable Price)
•
What we have done: Our sample of 1,613 stocks includes every stock that was trading in both March 2002 and March 2012. Consequently, companies de-listed during the past decade or that merged with other companies are excluded. Companies that listed during this decade and hence have a less-than-10-year price history are also excluded from our analysis (TCS, Coal India, NTPC, Maruti, Reliance Communications and DLF as examples). We have tested the causality to returns of stock size (i.e., market cap), capital efficiency of the company issuing the stock (i.e., change in ROE over 10 years), capital accumulation (i.e., growth in book equity per share), growth (EPS growth) and starting point of valuations (dividend yield and P/B).
•
How good are equity returns? The median 10-year return for a sample of 1,613 stocks that were listed and traded in 2002 is 18.4%, while the average price return is 18.7%. This compares with the 10-year bond yield of 7.5% in March 2002, implying a realized equity risk premium of 11% on median returns. The best performing sector was Utilities, followed by Energy, whereas Technology was the worst performing sector (trading at twice the market multiple even as the tech bubble had burst). Real estate was the best sub sector with a CAGR of 31%.
•
Back micro-caps: Wealth creation is the best in micro-cap stocks. The average return in the first and second deciles of market cap was 23%, superior to the median return of 18%. Nearly 85% of these stocks delivered returns better than the market’s.
•
Growth is critical: Capital efficiency (ROE) and capital accumulation (book equity) fail to explain returns on their own, but the combination – which is nothing but growth – is the most powerful single factor driving stock returns. Hence, the lesson from history is to back companies that are improving return on equity combined with judicious accumulation of capital.
•
Starting point of valuations matters: Stocks that had a rich valuation at the start of the decade failed to deliver superior returns and vice versa, on average. We also note that middling valuations fail to work for long-term stock-picking, i.e., the value trap is in the middle of the market, or stocks that trade around the market multiple. Deep value, in contrast, is a good winning strategy. Just because a stock is trading at a rich valuation does not preclude it from beating market returns – stocks of such companies sometimes deliver superior growth and strong returns.
•
Today’s large-caps may not be tomorrow’s winners: Buying the largest-cap stocks does not assure returns. Ten of the top 20 stocks by market cap in 2002 do not feature in the list of top 20 companies today. The average return from the top 20 stocks in 2002 is 13% – worse than the market median. Eleven of these 20 stocks underperformed the market. See page 9 for the winners of the last decade.
•
What about the coming decade? Arguably, returns are likely to be a tad lower. Valuations are higher than in 2002 but not rich by any measure. The starting point on ROE is also attractive. The only unknown is the growth in earnings. Various metrics we track suggest that the market is expecting long-term earnings growth to slow from the levels of the trailing decade. The market metrics are implying a return of around 15%, which would also be lower than in the past decade. See page 11 for some stocks that could be on the winners’ list for the coming decade.
Long-term Returns a Tad Better for the Broader Market
•
The median 10-year return for a sample of 1,613 stocks that were listed and traded in 2002 is 18.4% while the average return is 18.7%. The return distribution is skewed to the right – a reminder that distribution of returns does not necessarily mirror theoretical assumptions.
•
The median return exceeds the 10-year government bond yield or risk-free rate, which was 7.5% in March 2002, by almost 11ppts.
•
The Sensex has underperformed the broad market sample by 54bps annually.
Book Value and EPS Growth Remain Key for Returns
•
Capital efficiency (ROE) and capital accumulation (book equity) fail to explain returns on their own, but the combination – which is nothing but growth – is the most powerful single factor driving stock returns. Hence, the lesson from history is to back companies that are improving return on equity and judiciously accumulating capital.
•
As expected, growth alone is not enough. Valuations matter. Stocks that had a rich valuation at the start of the decade failed to deliver superior returns and vice versa, on average.
Small Is Big
•
Wealth creation is the best in micro-cap stocks. The average return in the first and second deciles of market cap was 23%, superior to median return of 18%.
•
Surprisingly, Utilities was the best performing sector in the trailing decade and Technology the worst. Nothing underpins the point better than this evidence that the starting point of valuations is crucial to long-term returns. The average EPS growth for Tech stocks was 12% compared with an average return of 4%. Tech stocks started this period at twice the market valuation.
•
Despite the post 2008 carnage, Real Estate still ends up as the best sub sector with a 31% CAGR.
Middling Valuations Are Bad
•
Middling valuations fail to work for long-term stock-picking, i.e., the value trap is in the middle of the market, or stocks that trade around the market multiple.
•
Deep value, in contrast, is a good winning strategy.
•
Just because a stock is trading at a rich valuation does not preclude it from beating market returns – stocks of such companies sometimes deliver superior growth and strong returns.
Large-caps Underperform
•
Buying the largest-cap stocks does not assure returns. Ten of the top 20 stocks by market cap in 2002 no longer feature in the list of top 20 companies (see those marked in red in the adjoining table).
•
The average return from the top 20 stocks in 2002 is 13% – worse than the market median. Eleven of these 20 stocks underperformed the market.
Returns could be a tad lower for the next decade
•
The starting points look okay. Valuations are higher than in 2002 but not rich by any measure (median P/B is around 0.8 times). The starting point on ROE is also attractive. The only unknown is the growth in earnings. However, various metrics we track suggest that the market is expecting long- term earnings growth to slow from the levels of the trailing decade. The market metrics are implying a return of around 15%, which would also be lower than in the trailing decade.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
1,613 stocks have delivered median 18.4% CAGR in price return over the past decade
This implies a realized equity risk premium of 11% on median returns. The common threads for the best performing stocks of the past ten years were: a) they were small – 85% of the bottom quintile delivered better than market returns; b) they benefited from strong earnings growth through a combination of reasonable return on capital and judicious accumulation of capital; c) they had reasonable valuations.
Today’s large-caps may not be tomorrow’s winners
Buying today’s largest-cap stocks does not assure better returns. Ten of the top 20 stocks by market cap in 2002 no longer feature in the list of top 20 companies. The average return from the top 20 stocks in 2002 is 13% – worse than the market median. Eleven of these 20 stocks underperformed the market.
What should we do today?
The key differentiating factor for forward returns is long-term earnings growth and, hence, our difficulty in nailing the list. That said, on page 11, we highlight stocks that meet any of two (valuations, ROE) of the three criteria needed for superior returns from a list of 449 stocks with market cap exceeding US$200 million. Prospects for returns appear only slightly inferior to ten years ago.
The Road to Wealth Creation: The Formula = GARP (Growth At a Reasonable Price)
•
What we have done: Our sample of 1,613 stocks includes every stock that was trading in both March 2002 and March 2012. Consequently, companies de-listed during the past decade or that merged with other companies are excluded. Companies that listed during this decade and hence have a less-than-10-year price history are also excluded from our analysis (TCS, Coal India, NTPC, Maruti, Reliance Communications and DLF as examples). We have tested the causality to returns of stock size (i.e., market cap), capital efficiency of the company issuing the stock (i.e., change in ROE over 10 years), capital accumulation (i.e., growth in book equity per share), growth (EPS growth) and starting point of valuations (dividend yield and P/B).
•
How good are equity returns? The median 10-year return for a sample of 1,613 stocks that were listed and traded in 2002 is 18.4%, while the average price return is 18.7%. This compares with the 10-year bond yield of 7.5% in March 2002, implying a realized equity risk premium of 11% on median returns. The best performing sector was Utilities, followed by Energy, whereas Technology was the worst performing sector (trading at twice the market multiple even as the tech bubble had burst). Real estate was the best sub sector with a CAGR of 31%.
•
Back micro-caps: Wealth creation is the best in micro-cap stocks. The average return in the first and second deciles of market cap was 23%, superior to the median return of 18%. Nearly 85% of these stocks delivered returns better than the market’s.
•
Growth is critical: Capital efficiency (ROE) and capital accumulation (book equity) fail to explain returns on their own, but the combination – which is nothing but growth – is the most powerful single factor driving stock returns. Hence, the lesson from history is to back companies that are improving return on equity combined with judicious accumulation of capital.
•
Starting point of valuations matters: Stocks that had a rich valuation at the start of the decade failed to deliver superior returns and vice versa, on average. We also note that middling valuations fail to work for long-term stock-picking, i.e., the value trap is in the middle of the market, or stocks that trade around the market multiple. Deep value, in contrast, is a good winning strategy. Just because a stock is trading at a rich valuation does not preclude it from beating market returns – stocks of such companies sometimes deliver superior growth and strong returns.
•
Today’s large-caps may not be tomorrow’s winners: Buying the largest-cap stocks does not assure returns. Ten of the top 20 stocks by market cap in 2002 do not feature in the list of top 20 companies today. The average return from the top 20 stocks in 2002 is 13% – worse than the market median. Eleven of these 20 stocks underperformed the market. See page 9 for the winners of the last decade.
•
What about the coming decade? Arguably, returns are likely to be a tad lower. Valuations are higher than in 2002 but not rich by any measure. The starting point on ROE is also attractive. The only unknown is the growth in earnings. Various metrics we track suggest that the market is expecting long-term earnings growth to slow from the levels of the trailing decade. The market metrics are implying a return of around 15%, which would also be lower than in the past decade. See page 11 for some stocks that could be on the winners’ list for the coming decade.
Long-term Returns a Tad Better for the Broader Market
•
The median 10-year return for a sample of 1,613 stocks that were listed and traded in 2002 is 18.4% while the average return is 18.7%. The return distribution is skewed to the right – a reminder that distribution of returns does not necessarily mirror theoretical assumptions.
•
The median return exceeds the 10-year government bond yield or risk-free rate, which was 7.5% in March 2002, by almost 11ppts.
•
The Sensex has underperformed the broad market sample by 54bps annually.
Book Value and EPS Growth Remain Key for Returns
•
Capital efficiency (ROE) and capital accumulation (book equity) fail to explain returns on their own, but the combination – which is nothing but growth – is the most powerful single factor driving stock returns. Hence, the lesson from history is to back companies that are improving return on equity and judiciously accumulating capital.
•
As expected, growth alone is not enough. Valuations matter. Stocks that had a rich valuation at the start of the decade failed to deliver superior returns and vice versa, on average.
Small Is Big
•
Wealth creation is the best in micro-cap stocks. The average return in the first and second deciles of market cap was 23%, superior to median return of 18%.
•
Surprisingly, Utilities was the best performing sector in the trailing decade and Technology the worst. Nothing underpins the point better than this evidence that the starting point of valuations is crucial to long-term returns. The average EPS growth for Tech stocks was 12% compared with an average return of 4%. Tech stocks started this period at twice the market valuation.
•
Despite the post 2008 carnage, Real Estate still ends up as the best sub sector with a 31% CAGR.
Middling Valuations Are Bad
•
Middling valuations fail to work for long-term stock-picking, i.e., the value trap is in the middle of the market, or stocks that trade around the market multiple.
•
Deep value, in contrast, is a good winning strategy.
•
Just because a stock is trading at a rich valuation does not preclude it from beating market returns – stocks of such companies sometimes deliver superior growth and strong returns.
Large-caps Underperform
•
Buying the largest-cap stocks does not assure returns. Ten of the top 20 stocks by market cap in 2002 no longer feature in the list of top 20 companies (see those marked in red in the adjoining table).
•
The average return from the top 20 stocks in 2002 is 13% – worse than the market median. Eleven of these 20 stocks underperformed the market.
Returns could be a tad lower for the next decade
•
The starting points look okay. Valuations are higher than in 2002 but not rich by any measure (median P/B is around 0.8 times). The starting point on ROE is also attractive. The only unknown is the growth in earnings. However, various metrics we track suggest that the market is expecting long- term earnings growth to slow from the levels of the trailing decade. The market metrics are implying a return of around 15%, which would also be lower than in the trailing decade.
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