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Tuesday, November 5, 2013

Wealth Creators: Stock Picking & Not Timing Creates Wealth

Investing in equity is not so much about knowing market peaks and troughs, rather it is about identifying potential wealth creators and backing them for years. This year has been quite volatile for equities and bulk of the returns have come in steep spurts spread over a few days. According to Annual Wealth Creation Study, a study on wealth creating companies, conducted by MOSL last year, investing in equity isn’t really about catching that spurt in stock prices, rather it is about identifying a company’s potential to create value and sticking to the choice in the long run.
The study shows ITC Ltd is the biggest wealth creator in the 2007-2012 with a market capitalization of Rs.1.19 trillion. Whereas the most consistent wealth creator is Kotak Mahindra Bank Ltd whose stock price has given a compounded annual growth rate (CAGR) of 48% in the last 10 years in terms of absolute wealth creation. According to the study, wealth creation is defined as the difference in market capitalization over five years (2007-2012) after adjusting for equity dilution and the stock price should have outperformed the Sensex. What it shows is good quality businesses which have an intrinsic value greater than their market price, grow investors’ wealth in the long term. This underlines the basics of equity investing; don’t try to time markets and invest for the long term based on company fundamentals.
Wealth Creators are Unique
For a company to create wealth consistently, it has to offer a unique product or service. First step to identify companies with competitive advantage or economic moat is looking at profits in the last 10 years. That should be above industry average. Sustainability of profits is important and so is the ability to make money going forward.
Asset managers take into consideration a concept called economic moat to outline the competitive advantage a company has. Having a competitive advantage enables a company to boost earnings and make money in the future. Morningstar Inc., a global independent equity research provider, in its annual investor conference held in Mumbai last year also talked about the importance of this concept, which it said is the cornerstone of its investment philosophy. According to Morningstar, an economic moat is a structural competitive advantage that allows a firm to earn above average returns on capital over a period of time.
Whether one defines it on the basis of profit or return on capital, economic moat measures the potential a company has to successfully overtake competitors over the long run. A company which has a distinctive product or service backed by competent management has the potential of growing earnings consistently over a long period of time and this translates into profit for investors as earnings growth gets reflected in stock prices.
Wealth Creators beat the Market
The wealth creation study also shows the potential of such stocks to beat benchmark returns. In the last five years, the top 100 wealth creating companies in the study delivered an earnings CAGR of 21% compared with benchmark earnings CAGR of only 9%. Stocks prices for these companies have given a return of 20% CAGR in the period compared with 6% for the Sensex.
This clearly shows the merit in backing fundamentals over trying to time the market. Fundamentals are the most important; one has to analyse management credibility and capability, quality of the product, financial health and competitors’ position and then decide on whether to buy a stock. At the same time, when markets are not doing well, choice of high dividend paying companies and those with healthy cash balance helps. Hence, there is an element of market environment which needs to be considered.
Identify your Best Option
Not everyone has the time and inclination to analyse stocks and be able to identify potential wealth creators. If that’s the case for you as well, don’t fret. Either identify above average funds or choose services of independent equity research firm and invest in good quality stocks yourself, that outperform the benchmark consistently over a period of 5-10 years and put your money at work. The strategy remains the same — identifying wealth creators and investing in them for long term.
Saral Gyan Wealth Creators (Since our Inception Year - 2010)
1. Cera Sanitaryware: Our equity analysts team identified Cera Sanitaryware in Dec 2011 and recommended our Hidden Gems members to invest in it at a price of Rs. 167. What made us to believe in Cera Sanitaryware as an investment opportunity was its superior products and potential to drive growth by expanding its reach to various geography of the country. Another important factor which impressed our team is significant increase in its market share by growing faster compared to well established competitors like HSIL in the same segment. 
Investment Returns: Stock of Cera Sanitaryware has recently made all time high of Rs. 625 giving astonishing returns of 275% to our members since Dec 2011. No profit booking suggested by our team and we continue to hold this stock in our portfolio for long term.
Cera Sanitaryware Research Report: Click here to Download
2. Mayur Uniquoter: We recommended investment in Mayur Uniquoter at price of Rs. 112 (bonus issue and split adjusted prices) in March 2012. Company is a market leader in the industry it operates, artificial leather industry offers great growth potential considering huge untapped market and its well accepted replacement products to original leather products. Company was in expansion spree with continuous rise in demand for its products and was distributing healthy interim dividends. Needless to say, nobody wants to kill animals to use their leather products. With continuous research and development, company offers more than 300 variety of artificial leather to its esteem clients like Ford, Chrysler, Hyundai, Nissan, Tata Motors, Maruti, Mahindra, Bata, Relaxo and many more.
Investment Returns: Mayur Uniquoter stock price has recently made all time high of Rs. 320 giving returns of 185% to our members since March 2012, recommended at price of Rs. 112 (bonus issue and stock split adjusted price). No profit booking suggested by our team and we will continue to hold this stock in our portfolio.
Mayur Uniquoter Research Report: Click here to Download
3. Kewal Kiran Clothing Ltd (KKCL): A company with experience of building strong brands since last 2 decades. As we know, strong brands offers huge competitive moat which yields to better operating and profit margins and help companies to own pricing power for their products. Our analysts missed Page Industries (owns right for selling Jockey in India and other Asian countries) and was looking for similar opportunity with justified valuations. KKCL owns brands like Killer and Lawman and is the only company from apparel industry which stands out in tough scenario with consistent profit when other companies like Provogue, V2 Retail were struggling due to high debt on books.  
Investment Returns: KKCL was recommended last year during Diwali at price of 729 for target of Rs 990, recently stock price touched its all time high of Rs. 1050 giving returns of 44% to our members in 12 months. Fundamentals are intact, valuations are reasonable and company has delivered strong set of numbers in this quarter, hence we suggest our members to stay invested in this stock for better returns in future.
Kewal Kiran Clothing Ltd (KKCL) Research Report: Click here to Download
If you wish to invest in fundamentally strong small and mid cap companies which can give you far superior returns compared to major indices like Sensex or Nifty in long term and help you creating Wealth, you can join our services like Hidden Gems, Value Picks & Wealth-Builder.
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Team - Saral Gyan.