Calculating the performance of stocks recommended by us over the past 2 years has shown that sticking to a principle always works
04-Nov-2014 •Vikas Vardhan
Our result shows why sticking to an investing principle in all market condition is important. In this quarterly evaluation of stocks recommended by us in the Stock Analyst Choice section, we calculated the performance of our recommendations over the past two years.
While our Stocks Analyst's Choice has always been companies with strong fundamentals, we tweaked our methodology in June 2012 to emphasise the stock's relative price attractiveness besides a more rigorous approach to fundamental evaluation. To make the evaluation realistic, we invested ₹10,000 in each of the stock on the date we made the recommendation and check where that investment stood now. Further, we invested the same amount of ₹10,000 in the Sensex on the same dates. So, on an investment of ₹4.8 lakh in 48 stocks, the value of our investments yield an IRR of 53 per cent to touch ₹8.60 lakh, which is way ahead of the Sensex's ₹6.49 lakh.
So, how did we manage this? The answer lies in following a simple approach to investment principles and sticking to it, irrespective of market movements. The key to good investment is not only finding a great company but good companies at great price. We have followed to the T, this principle espoused by the legendary Warren Buffet, whom we admire and are influenced by immensely. On a practical note, we followed the basic quantitative filters, numbers and valuations along with due diligence.
A vast majority of our picks come from various quantitative filters like stock ideas, which is listed each month and other such filters. We then go through the qualitative process of management check and other due diligence. Finally, we recommend a stock only if the valuation in terms of price to earning is below the historic level of 5 or 10 year median or if it is above the median level then the earnings growth should have outpaced the price to earnings making the PEG less than one. It is this simple, yet disciplined approach that has resulted in such performance.
Of importance is to know of how some of our digging of companies came about. For instance, in case of NBCC it was by looking at its enterprise value, which is nothing but the sum of market cap and debt, less the cash. The idea behind EV is that, to own a company completely you will buy the company at market capitalisation and pay for the debt and then get the cash held with company. When we first glanced at NBCC in December 2013, we figured it had a market capitalisation of ₹1,500 crore with zero debt and cash of ₹1,300 crore translating to an EV of ₹200 crore. This was an opportunity that we spotted to recommend this stock again in June 2014. Now when the market has realised its value, NBCC's market capitalisation has soared to ₹7,267 crore.
Everything was not rosy, we also witnessed some underperformers. We experienced two major jolts in Innoventive Industries and Wockhardt. Wockhardt's loss was due to a unforeseen reason when the US drug regulator USFDA found its plant unfit to export to US, its major market. In case of Innoventive, the failure taught us to not go by financials and valuations alone, especially when the management is dishonest. We missed to spot this aspect of the company.
However, what makes us take pride is the fact that over the past two years, we have done well with 33 of the 48 recommendations beating the Sensex returns over the same period. Yes, 15 stocks underperformed compared to the broad index and something we are working to improve on.
|Month||Company Name||Adjusted Recommended Price (Rs)||Current Price (Rs)||Absolute Gain/Loss (%)|
|01/10/2014||Mahindra Holidays & Resorts India Ltd||300||287||-4.2|
|01/10/2014||Tata Coffee Ltd||933||928||-0.5|
|01/09/2014||Finolex Industries Ltd||296||319||7.8|
|01/09/2014||Hindustan Media Ventures Ltd||154||176||13.8|
|01/08/2014||V-Guard Industries Ltd||656||915||39.5|
|01/08/2014||Gateway Distriparks Ltd||232||286||23|
|01/06/2014||Finolex Cables Ltd||163||224||37.2|
|01/05/2014||Rallis India Ltd||167||230||37.5|
|01/05/2014||Titan Company Ltd||255||393||54|
|01/04/2014||Godrej Consumer Products||761||968||27.2|
|01/08/2013||Cairn India Ltd.||296||285||-3.6|
|01/05/2013||Kaveri Seed Company||252||920||265.6|
|01/04/2013||Berger Paints India||192||397||106.9|
|01/04/2013||Innoventive Industries Ltd.||104||17||-83.4|
|01/12/2012||City Union Bank||53||85||60|
|01/11/2012||Mcleod Russel India||306||260||-15.2|
|01/10/2012||Solar Industries (India)||985||2492||153.1|
|01/09/2012||Amara Raja Batteries||196||653||233.5|
|01/06/2012||Elecon Engineering Company||53||54||0.7|
|01/06/2012||Kirloskar Pneumatic Company||470||591||25.8|