Our hits and misses of 2011-12:: Business Line

  

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Our ‘buy’ calls fetched an average 17 per cent return, beating the market. But primary market calls fared better than those in secondary markets, in a year where risk-taking ruled.

Small-cap stocks effortlessly outpaced blue-chips. Value investing themes like dividend yield failed miserably. Although interest rate cuts were modest, sectors such as realty, banks and airlines merrily partied on hopes that things would eventually get better. In short, the bull market of 2012 has not been rewarding for people who like to play it safe.

That is why, when we started our annual exercise reviewing our stock market recommendations, we didn’t expect any fireworks. After all, the analysts at Investment World are a conservative bunch. But analysis of our stock calls over a two-year time (from January 2011 to September 2012) threw up some surprises.

Unlike last year when our portfolio sported a loss, the stocks that we rated as ‘buys’ in 2011 and 2012 averaged a 17 per cent gain. We think this return is healthy for two reasons. For one, it beat the markets. Investments made in the Nifty or CNX 500, on the same dates, would have brought you a 13-14 per cent return. Also, these ‘buys’ were given in a period when the markets impersonated a roller-coaster; the Sensex still hovers 9 per cent below its January 2011 levels.

The returns also came without taking undue risks. Studiously avoiding the temptation from sectors such as media and realty, we remained selective this year, staying with quality companies that offered predictable profits at low valuations.

In fact, the eleven multi-baggers that we unearthed came mainly from our late-2011 value ‘buys’. A buy on Kaveri Seeds at Rs 367 yielded three-fold gains, while early-mover calls on Wheels India, Madras Cement, and PVR helped investors more than double their money. Each of these stocks was recommended when they traded at price-earnings multiples of 7-8 times, much before they became the rage in the markets.

Over a 100 stocks recommended during this period — a third of our calls — registered a 25 per cent plus return. But an equal number failed to turn in a gain. As the year progresses, we will surely take stock of them and revisit our calls.

ON IPO FRONT

Our track record on Initial Public Offers (IPOs) proved better than that in secondary markets. The portfolio of all the IPOs we asked people to invest in, featured a handsome 50 per cent gain by year-end. Investing in the Nifty on the same offer dates would have delivered just 10 per cent.

But that was thanks to a buoyant primary market this year. IPO buys on TBZ, Lovable Lingerie and L&T Finance Holdings clicked, while the ‘invest’ calls on PTC Financial Services and Central Bank disappointed.

As in the previous years, our recommendations to avoid some new issues and sell secondary market stocks worked quite well, hitting the bull’s eye two-thirds of the time. The IPO ‘avoids’ that saved investors from losing a lot of money include stocks such as Acropetal Technologies and Prakash Constrowell (down 86 per cent each from the IPO price) and Bhartiya Global (down 93 per cent). In fact, our IPO record would be even better, if you remove gainers such as Onelife Capital and PG Electroplast, which were later investigated by SEBI for manipulation.

Stocks which have declined sharply after our ‘Sell’ recommendation are Ahluwalia Contracts (down 81 per cent), Nalco (down 41 per cent), IL&FS Engineering (down 71 per cent) and others.

Despite a better show than last year, however, there are a few facts that we are not proud of. First, there is the set of ‘buy’ calls that have lost money for investors. The ones with steep losses of 40 per cent plus, were mostly commodity stocks (SAIL, Shree Renuka Sugars and CPCL), where we got the commodity cycle completely wrong or construction plays, where valuations simply shrank.

There were also stocks such as OnMobile which were brutally punished on governance concerns. Calls on blue-chips that didn’t work were those on Infosys, PNB and NMDC which languish 20 per cent below ‘buy’ prices.

We would have also liked to see more of our buy recommendations outpacing markets. While just over half of our calls did this, we would like the proportion to be two-thirds or more.

SOME HARD LESSONS

Overall, there were a few hard lessons that the markets drove home to us this year:

Being too cautious can be as costly as taking on too much risk. Had we recognised this in early 2012, we would have been less cautious about quality stocks in the consumer space.

Stocks which are levelled by governance or regulatory concerns may never recoup their peak valuation. It is best to recommend selling them even at a loss.

The 2012 rally, like the one in 2009, has conclusively shown that stock prices will always move ahead of fundamentals. Therefore, anticipating trends is important for stock recommendations to click. Waiting for concrete proof in terms of quarterly results can mean missed opportunities.

It is on these aspects that we will focus our attention in 2013. In the meantime, we are fully aware that when it comes to equity investing, no one is clairvoyant. So we reiterate that investors combine our stock ideas with exposures in index funds as well as diversified equity funds with a good record.