After the easy gains of 2009 where the rising tide lifted all boats, 2010 has proved much more tricky to navigate for stock market investors. To start with, mid- and small-cap stocks, which were going great guns in 2009, began to show signs of fatigue. The BSE Sensex has gained much more than the mid and small-cap indices in the last one year. Then broad-based gains evaporated and a few sectors took off, while others were left in the dust. BSE Consumer Durables, the star performer notched up a 56 per cent gain for one year but BSE Realty- the worst sector index - sank 32 per cent! The net result; whether your portfolio made any gains at all in the last one year depended on how well you chose your stocks and sectors.

It is in this complex backdrop we looked at whether readers of Business Line’s Investment World made money from acting on our stock recommendations. We considered all our fundamental calls made on stocks, IPOs and follow-on offers for the past two years starting January 1 2009 and ending June 30 2010. We ignored recommendations for the last six months because they wouldn’t have had time to come good. Our fundamental calls are essentially long term, made with a two-year view.

Beating the market

The results showed that our stock picks delivered notable gains and managed to trounce the benchmarks by a big margin as well. Take the secondary market recommendations. A person who invested in every one of our “buy” recommendations since 2009 would today be sitting on a gain of nearly 76 per cent on that portfolio. Had he simply invested the money in the Nifty index on the same dates, his returns would have been just 48 per cent.

That 28-percentage point outperformance of the market came mainly from the many multi-baggers that we unearthed over the two years. Fully 56 of the stocks we rated as ‘Buy’ turned out to be multi-baggers, they churned out a return of 100 per cent or more from the date of our recommendation.

Stocks that topped the multi-baggers list were: CMC (up 650 per cent), Unity Infraprojects (440 per cent), TTK Prestige (433 per cent), Rallis (up 423 per cent). That this list has a computer hardware major jostling for space with a pressure cooker maker and an agri-inputs player, shows that markets rewarded companies for growth irrespective of the sector they came from.

However, if sector choices didn’t matter too much in this period, timing your buys certainly did. It is no coincidence that eight of the ten recommendations topping our return rankings were made in the first four months of 2009, when stock prices were at rock-bottom!

Actively cashing out

Soaring valuations through the latter part of 2009 and 2010 did prompt us to turn more circumspect about stocks. We asked investors to ‘sell’ or ‘book profits’ in 26 stocks in this period. Over 16 of these stocks have since fallen sharply from those prices, even as the markets rose. ‘Sell’ calls that really saved investors a packet were Ackruti City (down 72 per cent from our sell price), Zee News (down 72 per cent) and Punj Lloyd (down 45 per cent). If investors had held on to all the stocks after their ‘sell-by’ date, they would have only a 11 per cent gain to show for it. Switching to the Nifty on those dates would have made them a 34 per cent gain.

Selective with IPOs

While we found quite a few attractive investment opportunities cropping up in the secondary markets, new offers proved to be quite a different ballgame. As IPOs, follow-on and rights offers hit the markets with some regularity, we gave out more ‘avoid’ ratings than ‘invest’. Investors who stayed away from the offers that we rated poorly would have avoided some costly mistakes. Twenty of the 30 IPO stocks that we asked investors to avoid, are today languishing below their offer prices. Raj Oil Mills, Euro Multivision, Tarapur Transformers today trade 60 per cent below their asking price.

One IPO recommendation that we heartily regret is Jubilant Foodworks. We asked investors to stay away owing to what we saw as very high valuations, but the conservative stance backfired. The stock of this pizza-maker is up over 345 per cent from the offer price.

Offers that we rated as reasonable investments did fare much better than the markets. But overall stocks cherry-picked from the secondary market delivered far better returns than the IPO candidates. This offers the clear lesson that investors should plumb for IPOs only if they have absolute conviction about the company’s credentials and growth prospects. If not, best to stick with staid old Nifty!

To-do list

Any areas that we need to work on in the year ahead? We can see two. For one, while our recommendations did work well on an average, we did find it hard to outperform that tough benchmark- the CNX 500 index. Only 60 per cent of our recommendations outperformed the markets during this two-year window (we refer to buys delivering more gains than the index and sells faring worse). It will be our endeavour to lift that hit rate over the next year.

Two, it is clear that stock selection will be a much harder task in 2011 than it was in the secular bull market of the past two years. Stiff market valuations, the fundamental headwinds facing some sectors and volatility in fund flows will prompt us to identify more stocks where investors should be cashing out. Shielding against downside will also become a key objective while we identify new investment opportunities.

Given the re-emergence of attractive investments among non-stock options such as fixed deposits, bonds and mutual funds too, we hope to provide investors who are overweight on stocks, with sufficient incentive to diversify into other asset classes too.

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