Prime Stocks performance review 2022

It is self-appraisal time for us at PrimeInvestor! 😊 As a team of self-critical analysts, we take great satisfaction from knowing where we went wrong, more than knowing what we got right. For knowing our mistakes is the only way to move forward to add value for you. 

While we may not always be able to clarify the market’s quirky moves in the short term, we know we can explain why we did what we did and whether we stand by it. In this report, we look at the hits and misses of our stock calls this year and what we will do to add more value next year. 

We start with a quick round-up of the market itself. After a stellar bull run lasting till October 2021 with some big-bang IPOs, the next 6 months took an adverse course leaving investors in a tizzy as a series of events, war, inflation and rate hikes followed.

Consequently, 2022 turned out to be a turbulent year of wild swings in the market. The mantle of leadership shifted from IT and metals to financials and auto. For the remaining sectors, it was a rollercoaster ride all the way. It needed plain luck to participate in sectors on time and exit before returns fizzled out.

Our approach in 2022

At the end of last year, when we did our review for 2021, we said two things: 

1. With inflation rising and developed world central banks reversing both easy money and low-rate policies, we think the year ahead could very well see a ruthless de-rating of global equity multiples, Indian markets and quality stocks with modest growth. Our investment approach will thus accord a higher weight to valuations than it did last year.

2. While it is nice to put out homilies such as ‘time in the equity market is more important than timing’, we are pragmatic stock investors and don’t really believe in them when it comes to direct stock investing. We know fully well that, to make a reasonable return from any stock, the timing of our entry (and sometimes exit) makes all the difference.

Besides the fact that markets behaved the way we anticipated, we largely executed what we stated above, in 2022. We did a reasonable job of both making timely entries in turnaround sectors of auto and banking as well as giving book profit calls in stocks where we believed valuations had run up sharply (thus squeezing future return potential), even if fundamentals remained good. We also reduced the number of calls we gave afresh this year to 10 as we remained conscious of the valuation versus growth potential of the stock. 

The result? Of the 10 calls we issued, 2 were given recently in December. So, we assessed 8 stocks. 6 of the 8 stocks or 75% of our calls outperformed the Nifty 50 by an average 12%. The table below has more details on the same.

While looking at the performance, do bear in mind that only 4 in 10 stocks in the Nifty 500 outperformed the Nifty 50 in 2022. And Nifty 50, which is the benchmark we considered, is a stiffer one to beat than the other major indices.

Essentially, our stock recommendations in 2022 turned out to be selective but with a high success rate as a result of a more focused approach, despite staying away from short term opportunities that emerged but fizzled out in no time. The details of these stocks are discussed in the next section.

Our hits and misses

While our 2022 record has been strong, we had to contend with underperformers from the previous year. So, let’s look at how our entire list of recommendations since January 2021 (when we launched Prime Stocks) fared. 

Since we started stock recommendations, the XIRR return of all the calls we made (including the sells) was at 11% as of December 16, 2021, compared to the Nifty 50’s 14.7%. If we remove the stocks in our Dividend Earners category (i.e., calls given more for regular dividend pay-outs and not as growth stocks), this underperformance reduces to about 1% instead of 3.7%.

Our 2022 calls have been significant outperformers, which has helped reduce the underperformance carried forward from 2021. We are hopeful that our calls in 2023 will further help wipe off the underperformance since launch.

Please note that the performance of each stock and index is available at all times in the Prime Stocks page. Also, please refer to the Prime Stocks list for the latest recommendations. This is only an appraisal report.

Our Hits

Our top 2 performers till date – Bajaj Holdings and IRCTC – were from 2021; we moved these two to hold due to the steep run up in price and valuations. An off-beat pick in the Dividend Earners space - IndiGrid Invit, in 2021 – continues to deliver well with an XIRR of 12.4% since our recommendation (including the dividend pay-outs) - far surpassing any income earning asset class.

We also shifted Coromandel International to sell, to lock into profits, due to new regulations fundamentally shifting the prospects of the sector. The stock is down 7% since the sell call.

Markets in 2022 shook off earlier fancied themes of the previous year, began to look into laggards, turned focus on core economy plays that could benefit from the domestic growth revival, and sought stocks that were transforming or geared up to tackle a changing global scenario. Value as a theme began to take up more prominence rather than growth or quality stocks. Many of our 2022 calls were also built on the turnaround prospects in different sectors, as the economy fully opened up post Covid. Our focus was on identifying such turnarounds, with the shift in market perspective.

• Auto recovery: Our calls on stocks such as Asahi Glass and Bharat Forge rode the automobile resurgence – backed by strong earnings growth and a business transformation that was happening. These calls panned out well. 
• Banking turnaround: Similarly, in the banking space, we took a call to play the sector at large when the banking recovery took root. We first gave a bank ETF when the sector gave clear signals of a turnaround. We later added Axis Bank, when the price was just right. 
• Other recovery plays: Our call on V Guard Industries was also timed to participate in the consumer discretionary recovery. We are waiting for the capital goods story in Carborundum Universal to play out, and we’re confident that it will.

Our Misses

Some of our hits in 2021 saw a decline in performance as they fell out of market favour in 2022, despite stable fundamentals. For instance, our calls on Infosys and Galaxy Surfactants still hold at double-digit returns, but both have moved to index underperformance this year. This does not worry us much as the cyclicality in these sectors is bound to impact these high-quality stocks as well. If any, the current scenario provides entry opportunities. 

With HDFC, we are willing to stay put given the impending merger with HDFC Bank. HDFC Bank itself has seen improved prospects in recent times. 

We did some course-correction in stocks such as Tata Steel Long Products and Engineers India, to limit the impact of continued poor performance, by issuing sell calls. In the case of Tata Steel Long Products (TSLP), an acquisition cast doubts on its standalone prospects. Our doubts were proved right, as the board later decided to merge itself with Tata Steel on a share swap ratio of 67 shares of Tata Steel for 10 shares of TSLP.

With Engineers India, we exited on concerns of sound order book not converting to adequate revenue growth. We booked a marginal loss of 2.4% (XIRR return considering the high dividend pay-outs for the stock). 

While we changed tack in some of our calls to limit downside impact, our Buy list has some acute underperformers. A brief explanation on our stance on these stocks is below.

• We gave a clear long term (5-year plus) call on Syngene. The company’s prospects have improved significantly post our call even though the stock still hovers around our recommended price. 
• Mahanagar, on the other hand, had to consistently combat gas price volatility. However, the recent proposal on APM for gas distribution could provide stability and uptick in volume. Still, if we find the opportunity lost is hard to bridge, we will not hesitate to exit the stock. 
• Advanced Enzymes was hit by demand-supply woes and margin collapse. A changing external environment and management initiatives offers confidence in its comeback. We will watch this stock for improvement but we may not be willing to provide more leeway into 2023. 
• Greaves Cotton has fresh external worries popping up after the Govt investigation on EV 2-wheelers (post the reported fire incidents) and pending the release of subsidies. The industry thrives on subsidies and cutting the same for top 2 players, Hero & Okinawa (it is an Indian company!), raises concerns for Greaves Cotton too. Our hope is that the government will take serious note of the industry issues and settle subsidy claims expeditiously while pushing for better compliance. This will also be a stock we will closely watch, for developments.

IPO review

We are always selective in our IPO coverage. More often than not, our calls on IPOs in both 2021 and 2022 have tended to be avoids – and several of these are simply because valuations were extremely high even if the business may be strong. 

• Our avoid calls on Fino Payments Bank, PB Fintech, One97 Communications (Paytm), ABSL AMC and Star Health would have saved you from losses that would have halved your corpus. Some avoid calls on the IPOs of Sona BLW and Devyani International backfired with a stellar debut and gains largely being retained.  
• Our invest calls on IPOs of Glenmark Life and LIC did not yield results. With LIC, our call was based on attractive valuations. And we do think our thesis on the company remains intact. The company has even gained market share post IPO and taken positive business decisions such as moving into ULIPs. But what we did not anticipate was a de-rating in the entire insurance industry. LIC too took the hit. Given that the sector may not revive any time soon, it may be prudent to cut losses and reinvest in other emerging opportunities. On Glenmark Life - while the Covid driven leap in profitability evaporated for many pharma companies leading to sales and profits flattening, the downside from here appears low for Glenmark Life, considering the company is on track with capex and R&D. The low valuation also provides comfort from risk of any material downside. Hence, we prefer to wait with the stock.

Looking at our calls on a risk-reward basis, you would have stayed away from traps with our avoid calls with IPOs. As far as listing gains go - we are not good at guessing listing gains, we don’t review IPOs from that angle, and we have always stated that!!  😊

Risky bets through our smallcase portfolios

Wild sector moves and a volatile external environment led us to giving fewer recommendations in 2022 while sticking mainly to mid and large sized companies. We also stuck to sectors that the market started viewing favourably - financials, auto, and capital goods - to play alongside the market than go contrarian.

While we did have bigger winners (outside Prime Stocks), we played them in our smallcase portfolio rather than give them as individual calls - primarily to avoid the significant downside risk in such stocks. To illustrate, the stock that delivered the highest return (55% in less than 6 months) in our Auto++ smallcase (launched in end-June 2022) was Ramakrishna Forgings, a company with high debt and exposure to volatile automobile exports. If the call had gone wrong, the downside would have been high in an individual call but more contained in a portfolio. Hence the decision to take such bets through our portfolios.

If you are unaware, we launched three smallcase portfolios in 2022. One all-ETF portfolio and two other themes on finance and auto comprising 12-15 stocks. Investors with high-risk appetite can use them as part of their satellite portfolio (outside core). 

So, what if you are looking for risky bets? We plan to highlight such stocks for you, whether we give a buy on them or not. For this purpose, we will be covering stocks that are interesting as part of our review (more in the next section).

Our approach in 2023

We will have a detailed report on our 2023 equity outlook in January. But as things stand, what is emerging is that the worst of interest rate hikes and commodity price inflation may be behind us. Still, the impact of the aggressive rate hikes on economic output data in 2023 may create some volatility, but within the boundaries of estimation. 

We plan for the following in 2023:

1. In a less volatile environment (if it happens to be so), we may also turn a bit more aggressive with our recommendations, but the focus will stay within the sectors that we understand better.  We urge our subscribers not to lose patience if we refrain from calls for extended periods or bunch them up at one go. 
2. Do not expect ‘a lot of calls’ from us, unlike many other research houses. We prefer to remain selective like we did with our calls in 2022 and deliver better performance for you. We also have an obligation to wipe away the impact of some of the poor calls in 2021. 
3. Even when we find comfort with fundamentals, we plan to wait for the right price to enter a stock, taking help from charts where necessary. We will make our Watch list (a tab in Prime Stocks) more dynamic to include these stocks. 
4. We plan to do more stock reviews on promising mid and small companies that are less known or turning around or addressing huge opportunities in less-addressed markets. In these cases, the eventual stock performance will depend on the success of their execution. If you have high risk appetite and understand the stock world, you can catch them early if you are convinced. In the past we have covered stocks such as Federal Bank, Godrej Agrovet, MIDHANI, RITES and Gati. 

As the curtains close in 2022, our sincere thanks to all of you for your support and for being patient with us whenever markets delivered higher than we did. We are hopeful that your patience will pay off handsomely. 

Happy Investing!

Disclosures and Disclaimers

The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (hereinafter referred to as the Regulations).

1. PrimeInvestor Financial Research Pvt Ltd is a SEBI-Registered Research Analyst having SEBI registration number INH200008653. PrimeInvestor Financial Research Pvt Ltd, the research entity, is engaged in providing research services and information on personal financial products. This Research Report (called Report) is prepared and distributed by PrimeInvestor Financial Research Pvt Ltd with brand name PrimeInvestor.

2. PrimeInvestor Financial Research Pvt Ltd, its partners, employees, directors or agents, do not have any material adverse disciplinary history as on the date of publication of this report. 

3.  PrimeInvestor Financial Research Pvt Ltd has not received any compensation from the subject companies in the past twelve months. PrimeInvestor Financial Research Pvt Ltd has not been engaged in market making activity for the subject companies.

4. In the last 12-month period ending on the last day of the month immediately preceding the date of publication of this research report, PrimeInvestor Financial Research Pvt Ltd has not received compensation or other benefits from the subject companies of this research report or any other third-party in connection with this report.

General disclosures & disclaimers