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Suresh Krishnamurthy

THE yo-yo trends in the market have confounded investors since March. It now seems almost certain that a spell of stagnation in stock prices, if not a decline, is upon us. The fear of the bear hug has led to the search for stocks with the right credentials to beat the market. This search could, however, be challenging.

Even for a short period of four years, there has not been an all-season stock. Among the top 150 stocks traded, not one stock has beaten the market in the sixteen quarters between 2001 and 2004.

There are, however, a handful of 15 stocks — one-tenth of the sample size — which have beaten the market in all the four years, though they may have slipped up in a couple of quarters. These include Jubilant Organosys, Oriental Bank, Glenmark Pharma, Jindal Steel, Bharat Forge, Sterling Biotech, Federal Bank, Indian Overseas Bank, GMDC and Container Corporation.

Though identifying these stocks is not easy, the rewards would be substantial. These 15 stocks, in aggregate, beat the market by a ratio of 3:1, unmatched even by mutual funds. The `market' refers to the BSE-200 Index.

Search for skew: Of the 150 stocks in the sample, the average stock beat the market once every two quarters. Only about 20 stocks beat the market in at least more than 10 quarters. Surprisingly, the worst performer in the past four years was Hindustan Lever, which beat the market in only two of the sixteen quarters.

Given that no stock outdid the market in all the sixteen quarters and only one-tenth of the sample size beat it in all the four years, the odds of identifying all-season stocks appears remote. Investors would be better off looking for stocks that lose only a little more than the market when the market tanks, and rise substantially when the market is on the ascendant.

Fifty stocks from the sample of 150 exhibit such characteristics. The average return from this sample is also spectacular. Between 2001 and 2004, they beat the market by a ratio of 3:1. Since one-third of the sample falls under this category, identifying such stocks may also be less challenging.

Market out-performers: Stocks that lose only a little more than the market when prices drop and rise sharply when market goes up include a number of public sector companies (Bharat Electronics) and mid-cap growth stocks (Kotak and Glenmark).

A number of them are, however, from sectors in which there is a cyclical upturn such as shipping (GE Shipping and Essar Shipping), textiles (Century Textiles and Raymond), power (Neyveli Lignite and Reliance Energy), capital goods (Alfa Laval and Siemens) and oil refining (Chennai Petroleum and Kochi Refineries).

A number of stocks that have restructured and turned around are also part of the list. These include Jindal group stocks, Crompton Greaves and Mangalore Refineries.

Broadly, the search for market out-performers could zero in on mid-cap growth and turnaround stories. They could be invaluable for your portfolio. Some sectors that are in the midst of a cyclical upturn that appears set to last longer include textiles, shipping, iron ore, non-banking finance including housing finance and chemicals.

Larger picture: The quarter-wise performance of stocks between 2001 and 2004 highlight that momentum in a bull market is an investor's friend. It is an important input in your decision-making.

Don't be fooled if a turnaround stock that rose sharply in a bull market failed to sustain the pace in a bear market. The consolidation phase in a bear market may be an opportunity to buy.

The numbers also indicate that buying and selling based on price performance every quarter could throw you off the money trail. At the same time, a strategy of buying and holding stocks is a non-starter. A holding period of one year for a stock in your portfolio appears a safer proposition.

Include a stock in your portfolio only if you feel it can outperform the market in the next 12 months. If you feel it would take longer, the better course would be to wait.

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