If you find a stock where the company enjoys a competitive advantage, has a moat and has been reporting steady earnings growth, lap it up.
There have been instances of stocks with such traits delivering mouth-watering returns! In one case, an investment of just Rs 10,000 grew to Rs 1.50 crore in 10 years.
In the case of Westlife Development, the master franchisee of McDonald’s restaurants in West and South India, an investment of Rs 10,000 in March 2009 has grown to Rs 1.45 crore as of today, delivering a whopping 1,449 times return.
A little-known stock in 2009, Westlife Developments became the market’s darling during 2012-13 when McDonald’s franchisee Hardcastle Restaurants became its direct subsidiary. The stock climbed to Rs 372 on December 31, 2013 from Rs 0.20 in March 2009. From 2013 onwards, the scrip has traded in the Rs 160-400 range. Progressive Share Brokers is bullish on Westlife Development with a price target of Rs 425.
Bajaj Finance has been another big compounder. Since March 2009, an investment of Rs 10,000 in this stock would have grown to Rs 57 lakh, growing exponentially at 88 per cent annually. A similar investment in leading shrimp feeds manufacturer Avanti Feeds would have made you Rs 33.30 lakh.
Astral PolyTechnik, Ajanta Pharma, Vinati Organics, LA Opala RG, Mayur Uniquoters, Eicher Motors and Poly Medicure are other such stocks which have grown an investment of Rs 10,000 into Rs 8-33 lakh during this period.
Global brokerage Macquarie recently maintained an ‘outperform’ rating on Eicher Motors with a price target of Rs 24,000. The foreign brokerage said structural demand drivers remained intact for the company. However, sales of Royal Enfield (RE) were impacted by large price hikes in the recent past. “RE sales growth should pick up in the coming months,” it said.
Stock returns do not come so easily and it’s not easy to spot such stocks. An investor should devote time to do the research on prospective investment opportunities to increase the chances of spotting such big compounders.
Some basic traits like good leadership, clean balance sheet, revenue visibility, scalability and sustainability usually are first signs that differentiate the wheat from the chaff.
The price at which a stock is bought is also important, as are other parameters such as reasonable to no debt, strong parentage, high return on equity (RoE) or return on capital employed (RoCE) and consistent earnings, even in a weak macro environment.
Top line and operating profit are two other major components that can give a clear picture of a company’s operating performance. The operating performance should reflect in valuations.
Companies whose share prices have grown over 5,000 per cent in last 10 years include TTK Prestige, Stylam Industries, Balkrishna Industries, Natco Pharma, Havells India, VIP IndustriesNSE 1.83 %, Gruh Finance, Supreme Industries, Whirlpool of India, IndusInd Bank, Aarti Industries, Minda Industries and KPR Mill.
ICICIdirect has a hold rating on TTK Prestige with a price target of Rs 8,800. Religare Broking is positive on VIP Industries with a price target of Rs 551.
But the bad apples can erode your wealth even faster. Shares of companies like Educomp Solutions, IVRCL, ABG ShipyardNSE 0.00 %, Punj Lloyd, Videocon Industries, Reliance IndustriesNSE -0.48 %, Unitech, MMTC, Religare Enterprises, Bilcare, Shriram EPC and Bombay Royon Fashion have dipped up to 90 per cent in last 10 years.