100-bagger stocks versus 100-bagger portfolios - LiveMint

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Last Modified: Sun, Nov 06 2016. 11 59 PM IST

100-bagger stocks versus 100-bagger portfolios

In India, there are 5,000-plus stocks listed on the exchanges, with numerous companies going out of business every year. So, only on 4-5% of the total trading days could one have bought these 100 bagger stocks

Investors are getting excited about hunting, chasing and capturing the 100-bagger stock. The allure of this new fad is not hard to see. The allure is similar to what typical angel investors and venture capitalists chase, i.e., finding the next Google or Facebook. It provides bragging rights to the discoverer. It is just one catch, but it takes 20-30 years, or more, for the typical 100 bagger to deliver. Most braggarts would be much older by then and the excitement of bragging would be much mellowed.

Everyone is keen on learning and playing the new game in town. No one seems to be questioning whether the game can be played at all. The inspiration for all this is a book—100 to 1 in the Stock Market, by Thomas W. Phelps, first published in 1972. You may not have heard of this book but it is famous now, thanks to the fad.

The interesting part is that over a 40-year period, till 1971 in the US, there were only 365 stocks that turned 100 baggers. Another study of 50 years or so also revealed 365 names (also in the US market). Another Indian study revealed 47 stocks over 20 years. That tells you how rare these opportunities are.

In India, there are 5,000-plus stocks listed on the exchanges, with numerous companies going out of business every year. So, only on 4-5% of the total trading days could one have bought these 100 bagger stocks, selecting the ‘One’ from the 5,000-plus stocks trading on that day. And then—and this is critical—the stock had to be held for the next few decades before it turns into a 100 bagger.

Some of the markers of a 100-bagger are:

• The market for the products or services of that company should be scalable, so that volumes and sales can grow manifold

• The margins should be growing, so that the earnings can accelerate

• The valuations or price-to-earnings (P-E) multiples should be low, so that multiples expansion can happen.

A typical example would be a stock whose sales have grown by 10 times; margins have doubled, i.e., the earnings are up 20 times; and the valuation multiples has gone from a P-E of 5 to 25. This would be a 100 bagger. Of course, all of this assumes that there were no issuances of stocks during the growth phase.

A typical 100 bagger takes 26 years. That translates to an annual return of 19-20%. This is not that difficult to achieve, especially in the Indian markets. Of course, you would lose buying power as well in the Indian markets, thanks to the high inflation. In fact, the whole Indian market itself could be a 100 bagger over that period. So an Indian investor probably wants to achieve that in half the time, i.e., 13 years. But that would mean an annual return of 42.5%, which is highly unlikely.

Another issue is that this whole process supposedly goes together with what George Baker, the 19th century American banker, said, “The vision to see them, the courage to buy them and the patience to hold them.” To which he added, “The rarest is patience.” Apart from these, vision too is a quality that is rare. Most people, whether investors or not, think that they have vision. In fact, except for venture capital investing, where it is an occupational hazard, vision is not a great thing for investors in listed securities. It becomes difficult to differentiate vision from delusion.

In hindsight, it is easy to see why Apple was always going to be a great company. Similarly, Nokia, Motorola and Blackberry were great companies and would have become even greater; except that they didn’t. Of course, everyone has an explanation on how that could have been identified at the peak of their stock prices. Similarly, a well-known fast food franchisee in India and a logistics company riding on e-commerce were investors’ darlings and the great visionaries could see where they were going. Except, now they are not the darlings they were.

An alternate approach to a 100-bagger portfolio would be to not chase a stock with our own visions or delusions projected on them, but invest in a basket, or portfolio of companies, that could provide that 20-25%-plus annual return. This would be achieved by focusing on companies that have stable business models, safe balance sheets, value-creating track records and are available significantly below their intrinsic value.

A basket of such investment-grade equities would turn out to be, not a 100-bagger stock, but a 100-bagger portfolio. The chances of succeeding in identifying a portfolio that could yield 25% with this methodology is much higher. And it would be much safer as well.

Vikas Gupta is executive vice-president—traded markets and investment research, ArthVeda Fund Management Pvt. Ltd.

Lessons from the money-spinners

http://www.thehindubusinessline.com/opinion/columns/aarati-krishnan/lessons-from-the-moneyspinners/article8089207.ece

The Big Story

Lessons from the money-spinners

Aarati Krishnan

It wasn’t the obvious stocks or sectors that created epic wealth for investors over the last 10 years. Here is an analysis of the multi-baggers

Let’s admit it. Most of us don’t invest in stocks to ‘beat inflation.’

We do it to create wealth on an epic scale. The secret wish of every stock market investor is to unearth that gem of a stock that goes up fifty or hundred-fold in 10 years, and helps him bid goodbye to his day job.

So, what are your chances of hitting upon such a stock? Is there any science to it?

BusinessLine studied all the NSE-listed stocks for which we had data going back 10 years (a universe of 788 stocks), to distil the lessons from the multi-baggers. The analysis also helped bust some common myths surrounding multi-bagger stocks.

The odds aren’t high 

First, banish the thought that buying and holding any old stock will deliver untold riches to your bank account. In the last 10 years (from December 2005 to December 2015), finding multi-baggers has been an uphill task for an Indian investor. This was a period in which the Nifty 50 delivered only a 10.8 per cent CAGR (compounded annual growth rate).

Mid and small-cap stocks didn’t fare much better. The Nifty Next50 (formerly Junior Nifty) clocked 13.6 per cent and the Nifty Midcap100 earned 12.7 per cent.

But if you were shooting for a 26 per cent return (that is, doubling your money every three years) 60 of the 788 stocks made the cut. That’s an eight in 100 chance of unearthing them.

Take the top wealth creator Ajanta Pharma. Had you plonked ?1 lakh on it in 2005, you would today be a crorepati. Eicher Motors (up 73 times), Amara Raja Batteries (67 times) and Indo Count Industries (40 times) were a few other toppers. (All stock returns in this analysis are adjusted for bonus and stock splits, and don’t include dividends).

Consumer isn’t king

There’s a misconception among investors that consumer firms are the kingpins of wealth creation, while industrial stocks are washouts. Is it not consumer companies that have a strong ‘moat’ by way of their brands, pricing power and high return on equity?

That may be true, but our list of top twenty wealth-creators features more B2B companies than B2C ones. There are four pharma companies (Ajanta Pharma, Lupin, Aurobindo and Natco Pharma), two auto ancillary firms (Amara Raja Batteries, Motherson Sumi) and even industrial plays like Somany and Kajaria Ceramics, Indo Count Industries (textiles), Shree Cement and Supreme Industries (plastic products).

The only true-blue consumer firms were consumer durable makers like TTK Prestige, IFB Industries and Hitachi Home.

In fact, the top 20 featured so many different businesses that one cannot pick any single sector that yielded sure-shot winners. Who would have thought to bet on a textile or ceramic tile maker in 2005?

In contrast, the losers list did feature one sector prominently — information technology. Eight of the 20 wealth-destroyer stocks which crashed 90 per cent-plus in a decade are from the software space.

Though the dotcom boom cracked in 2001, many tech stocks remained overheated for the next few years.

Investors who bet on 3i Infotech, Subex, Helios and Matheson at PEs of 16 to 33 times in 2005 saw both their earnings and PE multiple compress drastically, decimating wealth. Firms that turned out winners didn’t just get there by being in a fancied sector. They got there by focussing on their core business, scaling up steadily and avoiding hubris — no unrelated forays along the way.

The takeaway for investors is that to home in on real wealth-creators, you need to focus mainly on the company.

Hoping to make big bucks from identifying the next big ‘sunrise’ sector is a pipe dream.

Fundamentals do matter

Many Indian investors believe that the link between stock price performance and corporate earnings is tenuous. Doesn’t the Sensex sway daily to FPI flows? But experience from the multi-baggers shows that stock prices over the long term only respond to company earnings.

If the top 20 money-spinners delivered a 39 per cent CAGR in their stock prices over 10 years, they also managed a strong 32 per cent CAGR in their net profits over the same period. Don’t forget that this was a very challenging decade for the Indian economy, marked by two distinct downturns (2008-09 and 2012-13). Yet, profit growth for these firms ranged from 14 to 57 per cent, while their revenue run rates were 6 to 30 per cent.

Take the case of Ajanta Pharma. In 2005-06, this company was a pharma midget clocking profits of ?10 crore on revenues of ?205 crore, mainly from its bulk drugs business. Over the next decade, it proceeded to build up a basket of nearly 200 branded formulations in the domestic market and expanded aggressively into export markets such as Africa and Asia.

By 2014-15, its sales had scaled up six-fold to ?1,300 crore, and profits 30-fold to over ?300 crore.

Amara Raja Batteries, an automotive battery maker, clocked net profits of ?24 crore on sales of ?363 crore and was one-fourth the size of market leader Exide Industries in 2005-06.

Over the next 10 years, it scaled up to ?413 crore in profit (75 per cent of Exide’s level) while managing to top its rival’s return on equity. This also saw its PE multiple expand threefold to 33 times.

In fact, for most 10-year winners, the mind-boggling returns have not come about steadily through the decade.

They have come about in a short burst within three-four years when the stock got re-rated. For many firms, even as earnings steadily improved, stock prices remained stuck in a rut for many years. But once the markets started taking note, their PEs were quickly re-rated and they turned multi-baggers.

Eicher Motors, for instance, was an under-the-radar auto stock until 2008. Between December 2005 and March 2008, the stock had inched up from ?229 to ?249; but as the LCV market took off, the stock took the elevator to zoom to ?16,855 by 2015.

The lesson here is that, if a company is delivering decent earnings growth but the stock isn’t budging, you shouldn’t dump it in haste. You never know when the markets will take a shine to the business, no matter how unglamorous it may appear to be!

But the bad news is, the link between stock price returns and earnings has been equally strong for the wealth-destroyers too. It is not a coincidence that all of the bottom 20 stocks that have wiped out 95 per cent of their investors’ money have gone from profits to losses in the last 10 years.

Bargains may not deliver 

While selecting stocks for your portfolio, don’t assume the cheapest stocks in the sector are the best bets. Quite a few of the top wealth creators weren’t the biggest bargains in their sector ten years ago. With TTK Prestige at 20 times, Somany Ceramics at 19 times, Shree Cement at 18 times, Gruh Finance at 10 times, none of them was the most inexpensive in its sector.

The losers list, in contrast does feature stocks that appeared to be “value buys” in 2005. Surya Pharma (at eight times), Todays’ Writing Instruments (eight times) and Malwa Cotton (four times) started out with a low PE. But as their subsequent financial performance shows, the market wasn’t really under-valuing their prospects.

This argues against using purely quantitative filters such as low PE or low price-to-book value, to select stocks for your portfolio.

PSUs aren’t safe-havens

Hard as it is to find a unifying theme across all the multi-baggers, one does stand out — public sector firms are nowhere in the picture. For investors who think of government-owned firms as safe havens, it should be an eye-opener that the top wealth creator among PSUs (Bharat Electronics) barely delivered a 15 per cent CAGR and ranked a lowly 166{+t}{+h} in the listing. BPCL and Petronet LNG, also barely made the bar of 15 per cent.

But many PSUs — BEML, NTPC, BHEL, ONGC and PNB — fared worse. They barely matched your savings bank account, with a 2-5 per cent CAGR in 10 years. Some PSUs have lost big money too — MTNL (down 85 per cent), IOB (down 67 per cent) and HMT (down 48 per cent since 2005).

That a large number of PSUs operate in commodity sectors that are down and out today could be one reason for this.

But another reason certainly is policy intervention in every aspect of PSUs’ operations, which curtails their profitability and makes these firms unable to compete with their niftier private sector peers. If you’ve been a regular bidder in PSU divestment, think twice about weighing down your portfolio with too many of them.

Overall, all this analysis suggests that there’s only one secret sauce to finding multi-baggers — identify businesses that can consistently grow their profits over a decade. Whether the stock belongs to a fancied sector, whether it’s a value stock or a growth one, whether it is a B2C business or B2B — it doesn’t matter all that much!

(This article was published on January 10, 2016)