The traits of winning stocks: A Wealth Creation study

Ever wondered why only certain companies create huge wealth while others don’t?

ET Wealth delves into Motilal Oswal’s 23rd Annual Wealth Creation Study to discover the traits of winning stocks.



I. HDFC Bank is the biggest wealth creator for the first time ever
After consistently hugging the second and third rank for the last six studies, HDFC Bank has finally broken through to emerge as the biggest wealth creator over 2013-18.

Figures denote wealth created in Rs lakh crore


II. Five-year successive runs of biggest wealth creators broken again
HDFC Bank has dethroned TCS, suggesting that it is difficult to sustain the top spot beyond 5-year periods. Reliance Industries had a 5-year run earlier.

Figures denote wealth created in Rs lakh crore

III. High profit growth characterises the fastest wealth creators over 2013-18
Most of the fastest wealth creators have seen massive valuation rerating. Overstaying in these winners runs the risk of eroding much of the gains.

IV. Consumer-facing companies more likely to be consistent wealth creators
Most consistent wealth creators have shown steady earnings growth. However, in the last couple of years, valuation rerating has significantly amplified returns, which may not sustain going forward.

V. PSUs are insignificant wealth creators, but there are signs of bottoming out
Only those PSUs are creating wealth, which face minimal competition from the private sector. The 3 oil marketing companies(IOC, BPCL, HPCL), GAIL, Power Grid, Concor, Indraprastha Gas, etc, are all monopolistic. Bharat Electronics and NBCC also get nominated business from the government.

VI. High earnings growth is also rarely sustained beyond 5-6 years
In 1998, of the 188 companies with PAT above Rs 20 crore, 28 clocked a PAT CAGR of 25%+ in the fi rst 5-year period (1998-2003). Of these 28, only eight sustained 25%+ growth in the second 5-year period (2003-08). Just one managed it between 2008-13.

^with PAT above Rs 20 crore

VII. PEG < 1x is a solid formula for generating superior returns
Stocks with PEG less than 1x tend to significantly outperform the market. Nearly half the wealth creators were trading at PEG of less than 1x in 2013, and delivered the highest return.

PEG is price to earnings growth
Note: PEG here is calculated as PE of March 2013 divided by 2013-18 PAT CAGR

VIII. Sustaining RoE above cost of equity is a challenge
Only 22 companies managed to sustain RoE above 13% every year over the last 20 years