Rethinking Conventional Investment Wisdom
What are the 5 blue chip stocks in India, excluding cyclicals, that gave less than 6% annualized return over the last 10 years?
August 20, 2020
Rethinking Conventional Investment Wisdom: The Case of Blue-Chip Stocks
Introduction: In the world of investing, certain terms like "blue-chip stocks" often evoke feelings of safety and security. These well-established companies have long been considered a staple in equity investments. However, this blog aims to challenge this conventional wisdom and encourage investors to adopt a more critical and inquisitive approach to their investment strategies. Caution: What follows has the potential to reshape your perspective on investing.
A Closer Look at Blue-Chip Stocks: We'll dive deeper into this subject by examining a handful of companies that hold a significant place in India's corporate landscape. They operate in sectors we admire, yet their stock performance over the past decade raises questions.
1. LARSEN & TOUBRO:
This conglomerate operates in critical sectors like Defense, Infrastructure, and Hydrocarbons, with subsidiaries like LTFS, LTI, and LTTS.
However, its stock performance over the past decade has been lackluster, boasting a mere Compound Annual Growth Rate (CAGR) of 1.92%. In simpler terms, an initial investment of Rs 100 would have grown to just Rs 120 after 10 years.
2. BHARTI AIRTEL:
Once renowned as one of India's premier telecom operators, Bharti Airtel has faced its share of challenges.
Despite its reputation, the company's stock returns over the past decade reflect a CAGR of -6.33%. This means that Rs 100 invested a decade ago would now amount to just Rs 184.
3. TATA MOTORS:
As a subsidiary of the esteemed Tata Group, Tata Motors boasts global operations and owns luxury brands like Jaguar and Land Rover.
However, its stock performance has been far from impressive, with a -4.59% CAGR. An initial investment of Rs 100 would have dwindled to a mere Rs 62 in 10 years.
4. SBI (State Bank of India):
As the largest bank in India, SBI's stock performance has raised concerns.
Over the past decade, it has yielded a CAGR of -3.5%, resulting in an investment of Rs 100 growing to only Rs 70.
5. ITC:
ITC is a hotly debated stock known for its dominance in the cigarette industry and diversification into various sectors.
Despite discussions, its 10-year return stands at 6.23%, translating to Rs 100 growing to Rs 183.
Taking Dividends into Account: The above figures represent ex-dividend calculations, and even after factoring in dividends, the performance remains less than satisfactory. The question arises: why are these comparisons made right after the upheaval caused by the COVID-19 pandemic? The answer is simple: we were tasked with this comparison. Notably, some companies managed to outperform during the pandemic, proving that exceptional performance is possible even in challenging times.
It's essential to acknowledge that, apart from SBI, we primarily focused on private companies in this analysis. The performance of many government-owned companies is even less encouraging.
Factors Contributing to Underperformance: Several factors can contribute to the underperformance of blue-chip stocks, including capital-intensive operations with significant gaps between investment and payback, government interference, inconsistent free cash flows, structural changes in business, shifts in sector popularity, and varying revenue and earnings growth.
The Need for a Diversified Portfolio: In the world of investing, it's not uncommon for businesses to thrive, profits to increase, and everything to appear positive, yet the stock price remains stagnant. This underscores the importance of maintaining a diversified portfolio of stocks. Instances like Reliance's zero returns from 2008 to 2016 and HUL's zero returns from 2000 to 2010 serve as stark reminders of this truth.
Conclusion: As a full-time investor and trader in the stock market, my focus is on empowering individuals with knowledge and insights, rather than offering direct financial advice. I invite you to join me in the pursuit of a secure financial future through informed and independent decision-making. Knowledge is the key to achieving your financial goals.
It's worth noting that, in my opinion, technical analysis offers a more compelling field of study compared to fundamental analysis. The benefits of using technical analysis include its ability to provide valuable insights into market trends, entry and exit points, and risk management, making it a powerful tool for informed trading decisions.
~MS
Founder MARS EQUITY