The Hindu Business Line : Hits and misses

AS has been the practice over the past two years, it is time to take a hard look at the set of recommendations Business Line made over the past year to see how they have played out. For the analysis, recommendations made between October 2004 and September 2005 were considered.

Of the 330 calls made, more than half were `buys'. `Hold' accounted for 35 per cent of the recommendations, with `sells' making up the rest. The number of recommendations made in 2005 was fewer than those made in 2004 by about 40; but this was because there were more equity offers in 2005.

Our recommendations on IPOs have also not been factored into this analysis. Our coverage in 2005 was almost the same as in 2004 — 250 stocks.

How the recos stack up: Our `buy' calls will have delivered returns of 47 per cent.

If you retained stocks on which we had a `hold' recommendation, the value of your portfolio would have risen 40 per cent. And acting on all the sell calls would have led to an opportunity loss of 25 per cent.

Twenty-two of our buy recommendations have delivered returns of over 100 per cent.

Stocks that posted the highest gains within this lot included Taj GVK Hotels and Hotel Leeleaventure, as a combination of higher occupancy levels and increased average room rates bolstered earnings; Praj Industries and ABB, from the engineering space; Sesa Goa, from the commodities sector, riding on firm ore prices; and Aegis Logistics, a logistics player. Another 40 stocks delivered returns of 50-100 per cent.

Less than 20 of our `buy' recommendations resulted in negative returns. However, most of these calls are only marginally out of the money.

Nav Bharat Ferro Alloys, Indiabulls, Chemplast Sanmar and Satnam Overseas are a few stocks that are trading at a discount of 20 per cent to the `buy' price.

Thirteen of the `hold' calls delivered returns in excess of 100 per cent. Stocks such as Pidilite, Thermax, EID Parry, Varun Shipping and Subex Systems figure prominently in this list.

In a bull market, like in the one in 2005, a `call' to sell a stock may sound counter-intuitive and, more often than not, may also see the stock seeking higher levels subsequently. Our experience was no different.

Our top `sell' calls include the ones on SBI Home Finance (when it quoted at Rs 29; trading on the stock has been suspended) and Tata Finance. `Sell' calls that misfired include those on Hero Honda, KLG Systel, Indo Gulf and Dhampur Sugars.

What to expect in 2006: In our view, stocks belonging to the IT (frontline companies such as Infosys, TCS, Wipro and Satyam Computers), construction (L&T, Gammon India, Nagarjuna Construction and Hindustan Construction), consumer products (ITC, Asian Paints, Champagne Indage, UB Group), capital goods (ABB, Siemens and BHEL), mid-cap pharma (Cadila and Lupin) and auto components (Rico Auto, MICO, Sundram Fasteners and Sona Koyo Steering) could be the ones to keep a close tab on in 2006.

Logistics is another sector that is gradually emerging out of the shadows and may well turn out to the dark horse of 2006 with the focus on stocks such as Aegis, Gati, SICAL (despite concerns on governance) and Gateway Distriparks.

In the banking space, HDFC Bank and SBI — trading at two ends of the valuation spectrum in the sector — also merit close tracking.

We will also try to increase the stocks under coverage in the year ahead. Sectors that may be added to our scope include alcoholic beverages and gems & jewellery.

After the stellar showing over the past three years, investor expectations have also been marked up considerably.

But to expect a re-run of what happened in 2005 or, for that matter, 2004, may be a case of suspending reality.

The year 2006 may be the one in which investors would do well to moderate their return expectations and proactively book profits as and when the target rate of return is achieved.

And, yes, steer clear of those penny stocks! Happy investing!.