Quality Investing

Quality investing
From Wikipedia, the free encyclopedia

Quality investing is an investment strategy based on clearly defined fundamental factors that seeks to identify companies with outstanding quality characteristics. The quality assessment is made based on soft (e.g. management credibility) and hard criteria (e.g. balance sheet stability). Quality Investing supports best overall rather than best-in-class approach as the specific industry’s or country’s quality is evaluated as well.

Contents  [hide] 1 History 2 Identification of Corporate quality 3 Comparison to other investment models 4 References 5 See also

[edit]History

The idea for quality Investing originated in the bond and real estate investing, where both the quality and price of potential investments are determined by ratings and expert attestations. Later the concept was applied to enterprises in equity markets.

Benjamin Graham, the founding father of value investing, was the first to recognize the quality problem among equities back in the 1930s. Graham classified stocks as either quality or Low quality. He also observed that the greatest losses result not from buying quality at an excessively high price, but from buying Low quality at a price that seems good value.^[1]

The quality issue in a corporate context attracted particular attention in the management economics literature following the development of the BCG matrix in 1970. Using the two specific dimensions of life cycle and the experience curve concept, the matrix allocates a company's products – and even companies themselves – to one of two quality classes (Cash Cows and Stars) or two Non-quality classes (question Marks and Dogs). Other important works on quality of corporate business can be found primarily among the US management literature. These include, for example, "In Search of Excellence" by Thomas Peters and Robert Waterman^[2], "Built to Last" by Jim Collins and Jerry Porras^[3], and "Good to Great" by Jim Collins^[4].

Quality Investing gained credence in particular after the burst of Dot-com bubble in 2001 when investors learned of the spectacular failures of companies such as Enron and Worldcom. These corporate collapses focused investors’ awareness of quality from stock to stock. Investors started to pay more attention to quality of balance sheet, earnings quality , information transparency, corporate governance quality.

[edit]Identification of Corporate quality

As a rule, systematic quality investors identify quality stocks using a defined schedule of criteria that they have generally developed themselves and revise continually. Selection criteria that demonstrably influence and/or explain a company's business success or otherwise can be broken down into five categories:^[5]

1. Market Positioning: quality company possesses an economic moat, which distinguishes it from peers and allows to conquer leading market position. The company operates in the industry which offers certain growth potential and has global trends (e.g. ageing population for pharmaceuticals industry) as tailwinds.

2. Business model: According to the BCG matrix, the business model of a quality company is usually classified as star (growing business model, large capex) or cash cow (established business model, ample cash flows, attractive dividend yield). Having a competitive advantage, quality company offers good product portfolio, well-established value chain and wide geographical span.

3. Corporate Governance: Evaluation of corporate management execution is mainly based on soft-criteria assessment. Quality company has professional management, which is limited in headcount (6-8 members in top management) and has a low turnover rate. Its corporate governance structure is transparent, plausible and accordingly organized.

4. Financial Strength: Solid balance sheet, high capital and sales profitability , ability to generate ample cash flows are key attributes of quality company. Quality company tends to demonstrate positive financial momentum for several years in a row. Earnings are of high quality, with operating cash flows exceeding net income, inventories and accounts receivables not growing faster than sales etc.

5. Attractive valuation: Valuation ultimately is related to quality, which is similar to investments in real estate. Attractive valuation, which is defined by high discounted cash flow (DCF), low P/E ratio and P/B ratio, becomes an important factor in quality investing process.

According to a number of studies the company can sustain its quality for about 11 months in average, which means that quantitative and qualitative monitoring of the company is done systematically.

[edit]Comparison to other investment models

Quality investing is an investment style that can be viewed independent of value investing and growth Investing. A quality portfolio may therefore also contain stocks with Growth and Value attributes.

Nowadays, Value Investing is based first and foremost on stock valuation. Certain valuation coefficients, such as the price/earnings and price/book ratios, are key elements here. Value is defined either by valuation level relative to the overall market or to the sector, or as the opposite of Growth. An analysis of the company's fundamentals is therefore secondary. Consequently, a Value investor will buy a company's stock because he believes that it is undervalued and that the company is a good one. A quality investor, meanwhile, will buy a company's stock because it is an excellent company that is also attractively valued.

Modern Growth Investing centers primarily on Growth stocks. The investor's decision rests equally on experts' profit forecasts and the company's earnings per share. Only stocks that are believed to generate high future profits and a strong growth in earnings per share are admitted to a Growth investor's portfolio. The share price at which these anticipated profits are bought, and the fundamental basis for growth, are secondary considerations. Growth investors thus focus on stocks exhibiting strong earnings expansion and high profit expectations, regardless of their valuation. Quality investors, meanwhile, favor stocks whose high earnings growth is rooted in a sound fundamental basis and whose price is justified. (QVM approach)

References

1. ^ Benjamin Graham (1949). The Intelligent Investor , New York: Collins. ISBN 0-06-055566-1.
2. ^ Thomas Peters and Robert Waterman (1982). In Search of Excellence. ISBN 0-06-015042-4
3. ^ Jim Collins and Jerry Porras (1994). Built to Last. ISBN 978-0887307393
4. ^ Jim Collins (2001). Good to Great . ISBN 978-0-06-662099-2
5. ^ Weckherlin, P. / Hepp, M. (2006). Systematische Investments in Corporate Excellence, Verlag Neue Zürcher Zeitung. ISBN 3-03823-278-5.

[edit]See also

• Value investing
• Growth investing

http://en.wikipedia.org/wiki/Quality_investing

Most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

The high CAGR in the early years of the investing period, due to buying at a discount, tended to decline and approach that of the intrinsic EPS GR of the companies over a longer investment time-frame.

Chapter 20 - “Margin of Safety” as the Central Concept of Investment

A single quote by Graham on page 516 struck me:

Observation over many years has taught us that the chief losses to investors come from the purchase of low-quality securities at times of favorable business conditions.

Basically, Graham is saying that most stock investors lose money because they invest in companies that seem good at a particular point in time, but are lacking the fundamentals of a long-lasting stable company.

This seems obvious on the surface, but it’s actually a great argument for thinking more carefully about your individual stock investments. If most of your losses come from buying companies that seem healthy but really aren’t, isn’t that a profound argument for carefully studying any company you might invest in?

****Desired Characteristics for Potential Investment (Investment Philosophy of Magellan Infrastructure Fund)

Magellan Infrastructure Fund - Investment Philosophy


The Magellan Funds have two principal Investment Objectives:

• to minimise the risk of permanent capital loss; and
• to achieve superior risk adjusted investment returns over the medium to long-term.

Our Investment Philosophy is simple to state. We aim to find outstanding companies at attractive prices. We consider outstanding companies to be those that have sustainable competitive advantages which translate into returns on capital materially in excess of their cost of capital for a sustained period of time. While we are extremely focused on fundamental business value, we are not typical value investors. Securities that appear undervalued on the basis of a low price to earnings multiple or a price to book multiple will often prove to be poor investments if the underlying business is fundamentally weak and exhibits poor returns on capital. We will buy companies that have both low and higher price to earnings and price to book multiples provided that the business is outstanding and the shares are trading at an appropriate discount to our assessment of intrinsic value.

An outstanding company will usually have some or (ideally) all of the following characteristics:

WIDE ECONOMIC MOAT
An economic moat refers to the protection around an economic franchise which enables a company to earn returns materially in excess of the cost of capital for a sustained period of time.

Outstanding companies are unusual as capitalism is very efficient at competing away excess returns, in most cases. A company’s economic moat will usually be a function of some form of sustainable competitive advantage.

A strong indicator as to whether a company possesses an economic moat is the historical returns on capital (both including and excluding intangible assets) it has achieved. If a company has earned returns materially above the cost of its capital for a sustained period, it is a good indication that a company may have an economic moat. In some cases, a company may be developing a strong economic moat, but its historical returns on capital are low reflecting the investment in building a business with long-term sustainable competitive advantages. The key lesson is that historical returns on capital do not necessarily indicate whether a business has a wide economic moat and it is critical to fully understand the competitive advantages and threats which protect and threaten a company’s economic franchise.

Identification of companies with wide economic moats involves consideration and assessment of the barriers to entry, the risks of substitutes, the negotiating power of buyers and suppliers to a company and intensity of rivalry amongst competitors.

The following are illustrations of sustained competitive advantages:

• Where it is very expensive for consumers to shift from the incumbent provider (that is, where there is a low threat of substitutes) because of, for example, cost, inconvenience and/or regulatory restrictions.
• Where the leading market participant has material economies of scale which gives it a significant cost advantage over competitors or new entrants.
• Where the business has a strong and unique brand name or is protected by long-term intellectual property rights such as copyright, patents, trademarks and/or regulatory approvals.
• Where a company has a very strong network (ideally monopoly or proprietary). For example, where it is the vital intermediary between buyers and sellers, a market maker or even a ring road that tolls workers and businesses use as they move people and goods. We are particularly interested in networks where access, pricing and volume are subject to market forces and are not regulated in a materially adverse manner.
• Where the use of psychological imperatives (such as, safety, exclusivity and quality) drives customer loyalty and enables companies to charge a premium for their products or services.

Each of these sustained competitive advantages is relatively unusual and it is particularly valuable where a strong competitive advantage prevails over a long period of time. Market-based monopolies and proprietary networks can provide the strongest and most sustainable competitive advantages, but are extraordinarily rare.

RE-INVESTMENT POTENTIAL
We seek companies that have a moderate to high potential to continue to re-invest capital into the business at high incremental returns.

We believe that conventional investment analysis fails to properly assess the potential of a business to deploy material amounts of additional capital into the business at attractive rates of return. This is a fundamental driver of value over time.

The most attractive types of companies are either:

• Companies with wide economic moats which can continue to grow materially with very limited additional capital.
• These companies will exhibit rising returns on capital employed. These types of businesses are extraordinarily rare and extremely valuable.
• Companies with wide economic moats which have opportunities to deploy material amounts of capital into the business at high incremental rates of return. Examples include a strong retail franchise with substantial roll-out opportunity, or a retail banking or financial services franchise that can continue to grow its lending activities at attractive margins.

These types of businesses are rare and can be very valuable compounding machines. It is more usual to find businesses with wide economic moats which can only deploy very modest amounts of capital and exhibit modest growth potential. These businesses, while attractive, are less likely to be compounding machines than those with material high return re-investment opportunities.

We are therefore very focused on assessing a company’s ability to continue to re-invest free cash flow at high rates of return. It is factors such as, store roll out potential, global expansion potential, the size of the market and market share potential, and market growth rates, which will drive this re-investment potential.

We judge re-investment potential as low, medium or high depending on the level of re-investment over the medium term as a percentage of net income, and the rate of return expected to be achieved.

LOW BUSINESS RISKS
The purpose of assessing business risk is to determine the predictability of cash flow and earnings projections. Businesses which are difficult to predict or could exhibit large variations in cash flows and earnings have high inherent business risk.

We assess business risk taking into account factors such as cyclicality, operating leverage, operating margin, financial leverage, competitive strength, regulatory and political environment and profitability.

We assign each company a risk assessment: low, medium and high. This is not an attempt to measure the volatility of the shares, but rather the predictability and strength of the underlying business.

LOW AGENCY RISK
We term the risk surrounding the deployment of the free cash flow generated by a business as €˜agency risk’.

A fundamental assumption inherent in a standard discounted cash flow valuation (DCF) is that free cash flows are returned to shareholders or are re-invested at the cost of capital. The reality is that this assumption is often flawed as free cash flow is often not returned to shareholders but, rather, cash is re-invested by companies at returns below the cost of capital. In these cases, businesses can end up being worth substantially less than implied by a DCF analysis. We term the risk surrounding the deployment of the free cash flow generated by a business as agency risk.

A company which can deploy a substantial amount of free cash flow back into the business at attractive returns for a sustained period of time will almost certainly carry lower agency risk than a company which has limited opportunities to re-invest capital at attractive returns, unless the company is explicit about returning excess cash flow to shareholders via dividends and/or share buy-backs.

In assessing agency risk, we look at factors, including the structure and level of incentives offered to senior management, the level of share ownership by senior management and directors, the track record of management in pursuing acquisitions, the desire of management to grow their empire and the track record of management and the Board in acting in a shareholder friendly manner, including returning free cash flow to shareholders via share buy-backs and/or dividends.

The assessment criteria we apply in evaluating potential investments are depicted in the diagram here.



An ideal investment will normally have a number of combined favourable attributes operating together which would illustrate what Charlie Munger of Berkshire Hathaway describes as a Lollapalooza effect (which is a term for factors which will reinforce and greatly amplify each other).

MARGIN OF SAFETY
We will only purchase an investment when there is a sufficient margin of safety. The margin of safety is the discount we require before buying shares of a company. The bigger the assessed discount, the wider is our margin of safety.

The available margin of safety, we believe, is driven, in part, by prevailing market psychology. While not a driver of a company’s quality or intrinsic value, the markets can have a profound, albeit rarely long-term, effect on the pricing of a company’s shares. When short-term issues or concerns are worrying investors or other factors are resulting in excess enthusiasm (that is, irrational exuberance), shares will often be mis-priced relative to intrinsic value. While our process can make us appear to be out of step with trends, investing contrary to consensus thinking has the potential to provide investment opportunities. Understanding where current market sentiment lies and assessing the company within the context of whether the concern or excitement is being appropriately priced, is an important step in investing.

There are some exceptional businesses where the Lollapalooza effect is truly at work and the moat is so wide and the risks are so low that we will invest with a very modest margin of safety. It is more usual to find companies which do not have all the reinforcing factors at play which results in a higher level of risk and requires a higher margin of safety.

High-Quality Stocks Could Take Market Lead

July 18, 2010, 9:01PM EST

High-Quality Stocks Could Take Market Lead

Investors have ignored steady profits and predictable sales from companies in consumer staples and health care. Will the market now value them?

By Ben Steverman

Slower economic growth may be good news for stocks renowned for their resilience in tougher economic times.

This, in turn, could boost the performance of stock managers who specialize in these higher-quality, defensive names, especially in sectors such as health-care and consumer staples.

"Maybe we'll have our moment in the sun," says Scott Armiger, portfolio manager at Christiana Bank & Trust Co., who has a high concentration in consumer staples stocks.

As the stock market recovered from its decade low of Mar. 9, 2009, to its 2010 peak on Apr. 23, the Standard & Poor's 500-stock index's financial sector—beaten down by the financial crisis—rose 170 percent. The S&P 500's consumer discretionary sector, including retailers hurt by the slowdown in consumer spending, gained 124 percent.

"At the very beginning of a market upturn, the lowest-quality stocks tend to outperform," says Sean Kraus, chief investment officer at CitizensTrust. "You had a lot of [portfolio managers focused on quality] underperforming last year because they would not go" to lower-quality stocks.

ARE HIGHER-QUALITY STOCKS MOVING UP?
Falling behind was the S&P 500 health-care sector, up 43.5 percent from Mar. 9, 2009 to Apr. 23, and the S&P 500 consumer staples sector, up 44 percent, even as both sectors did a better job at maintaining earnings and sales during the recession.

Worries about the economy may already be helping higher-quality stocks outperform during the last several weeks.

The Morgan Stanley Cyclical Index (which measures economically sensitive stocks in the U.S.) is down 16 percent since Apr. 23, while the Morgan Stanley Consumer Index (a gauge of less economically sensitive companies) has fallen 9.8 percent.

While the S&P 500 has slid 12.5 percent since Apr. 23, the S&P 500 consumer staples sector is down 5.1 percent—and its largest company, Procter & Gamble (PG), is off 2.4 percent.

The S&P health-care sector and its largest stock, Johnson & Johnson (JNJ), are both down 8.6 percent since Apr. 23.

HEALTH-CARE EARNINGS HAVEN'T FALLEN
"Consumer staples and health-care stocks typically have more predictable, less volatile earnings streams," says Michael Sheldon, chief market strategist at RDM Financial Group.

According to Bloomberg data, health care is the only sector of the S&P 500 not to see quarterly earnings drop year-over-year in the past two years. The S&P 500 consumer staples sector's worst quarter, the fourth quarter of 2008, saw earnings fall 7.5 percent—as overall S&P 500 earnings were plunging 47.2 percent.

Several stock managers and strategists say that the current environment may give higher-quality sectors an advantage. "As the economic data continues to soften, we should see these better-quality names picking up steam," says Quincy Krosby, Prudential Financial (PRU) market strategist.

Federal Reserve minutes released on July 14 show that central bank officials have lowered their 2010 economic growth forecast from a range in April of 3.2 to 3.7 percent, to a range in June of 3 to 3.5 percent. Other data have supported the belief that the economy is slowing its growth rate, including a drop on July 16 of 9.5 points in the Thomson Reuters/University of Michigan preliminary index of consumer sentiment to 66.5, the lowest level in 11 months.

INVESTMENT FOCUS: LEADING STOCKS?
Still weighing on health-care stocks is the possible impact of federal health-care reform legislation that became law in March. On one hand, the law "wasn't nearly as bad as a lot of industry participants were fearing," says Morningstar (MORN) health-care stock analyst Matthew Coffina. On the other hand, the law is complex and could take years to fully enact. "Investors are on edge," Coffina says, reacting day-by-day to shifting perceptions of how regulators will implement the law.

Wayne Titche, chief investment officer at AMBS Investments, says a slower-growth economy will favor the leading stocks in many different sectors, including consumer discretionary and technology. The key, he says, is finding companies with strong balance sheets and cash flow, good management, and the ability to develop new products and gain market share.

Titche cites retailer Kohl's (KSS), which he owns. "They have the money to invest and take share from weaker players," Titche says.

A stock market that rewards quality is one that is thinking long-term, Titche says. Investors have become very short-sighted, he says. "People have totally lost faith in long-term investing."

In the past year, broad trends—from issues in the U.S. economy to the European debt crisis—have shaped the stock market. Soon, however, investors are going to have to make "stock-specific" distinctions between the strong and weak players in each industry, Krosby says. Despite "a slowdown in the economy, many stocks are going to do very well," she says.

Steverman is a reporter in Bloomberg's Chicago bureau.

http://www.businessweek.com/print/investor/content/jul2010/pi20100716_711583.htm

A brief appraisal of Crest Builder Holdings Bhd. (CRESBLD)

A brief appraisal of Crest Builder Holdings Bhd. (CRESBLD)

Cresbld is engaged in construction and property development.

Crest Builder is a class A contractor registered under catgory G7  with the CIDB which enables it to tender for any government and private contracts of unlimited value.  Not unlike the other listed contractors, CRESBD has also ventured into property development amid an extended gloom in the construction industry in the Nineties.

1.  Let's look at its historical Sales and Earnings

FY ending Dec 05  Sales 253 m  Earnings  11.7 m
FY ending Dec 06  Sales 318 m  Earnings  20.0 m
FY ending Dec 07  Sales 366 m  Earnings  40.2m
FY ending Dec 08  Sales 270 m  Earnings  12.3 m
FY ending Dec 09  Sales 325 m  Earnings  10.7 m



2.  The company is in a competitive business which is rather challenging.

(No economic moat).

3.  Future Growth Drivers

Not analysed.  However, you can get an idea of the present and future activities of this company by visiting these posts.  Courtesy of Eric Yong's Blog.

• Avenue Crest, Shah Alam.
• Northshore Gardens, Desa ParkCity - Updates.
• Chua Tower, Jalan Binjai - Updates.
• Crest Builder riding the development wave in PJU.

Past Projects:

• Property development called 3 Two Square in Section 14, PJ in 2007. The project comprising a corporate office tower called The Crest and retail shops and offices contributed materially to the record earnings in 2006 and 2007. CRESBLD has retained the Corporate Tower 'The Crest' and the car parks for recurring income, marking its entry into property investment/management.
• Mixed development scheme called Alam Hijau in Mukim Damansara.
• Other projects are located in Kelana Jaya and Mont Kiara.

4.  Long Term Liabilities and D/E ratio

FY ending Dec 05  LTL 78.8 m  D/E 0.71

FY ending Dec 06  LTL 67.6 m  D/E 0.53

FY ending Dec 07  LTL 90.4 m  D/E 0.56

FY ending Dec 08  LTL 45.6 m  D/E 0.54

FY ending Dec 09  LTL 111.46 m  D/E 0.65

Note:  The amount of net debts rose substantially in 2009.

FY ending Dec 05  Interest Expenses 4.79 m

FY ending Dec 06  Interest Expenses 4.70 m

FY ending Dec 07  Interest Expenses 8.05 m

FY ending Dec 08  Interest Expenses 8.03 m

FY ending Dec 09  Interest Expenses 8.28 m

5.  ROE

FY ending Dec 05  7.71%

FY ending Dec 06  11.11%

FY ending Dec 07  18.58%

FY ending Dec 08  5.55%

FY ending Dec 09  4.66%

6.  CAPEX required to maintain current operations

Not analysed

7.  Is Management is buying or holding the stock?

FY ending Dec 05  Mr.  Yong Soon Chow (Direct & Indirect) 43.66%

FY ending Dec 06  

FY ending Dec 07  

FY ending Dec 08  

FY ending Dec 09  Mr. Yong Soon Chow 34.61% Yong Tiok Chin (daughter of YSC) 6.18%

8.  Price versus Intrinsic Value

NTA per share

FY ending Dec 05  NTA/Share RM0.75

FY ending Dec 06  NTA/Share RM0.92

FY ending Dec 07  NTA/Share RM1.47

FY ending Dec 08  NTA/Share RM1.52

FY ending Dec 09  NTA/Share RM1.59

Given the strategic location of the properties namely, Corporate Tower 'The Crest' and the car parks, hefty fair value adjustments on investment properties lifted the NTA sharply (+61%) in 2007.

Present Price of CRESBLD share: MR0.69

Number of shares: 124.09 m

Market Cap 85.6 m

Warrants 24 m units Maturity 30/5/2013 Exercise Price RM 1.00


Well, will you buy this stock for long term investment?

I won't because this stock fails my tests for a GOOD QUALITY company.  It is neither a great nor a good, but a gruesome company by my definition.

I invest and I rarely speculate.

Take a long shot in such choppy markets. Investors tend to forget that equities deliver only in the long term

Take a long shot in such choppy markets
24 May 2010, 0501 hrs
IST,Nikhil Walavalkar & Prashant Mahesh,ET Bureau

Increased volatility in markets has made life difficult for equity investors in India. The risk that some European governments may default has thrown a scare into equity markets globally. Though domestic economic fundamentals are sound, flight of some foreign funds has eroded value of companies on Indian exchanges.

A look at indices’ movement shows that S&P CNX Nifty has lost 5.43% since January 2010 whereas Nifty Mid-cap 50 index lost 2.21%. But this is rather deceptive. If one looks at the fall from the highest point, the indices (the Nifty level of 5374) in the current calendar year, the Nifty lost 7.94% in 30 sessions and Nifty Mid-cap lost 7.32% in 14 sessions, as on May 20, 2010. This has confused retail investors. Now, the million-dollar question that haunts all of them is — “What should I do with my equity investments?”

QUICK ACTIONS

Though often repeated, investors tend to forget that equities deliver only in the long term. So, if you are there with your short-term resources for some quick buck, just follow the classical advice and get out of equities. This applies to even the best of the conviction ideas you have. “Though there is some global uncertainty, there is no crisis. The current correction is a good buying opportunity, as markets have corrected 10-15%, and we are positive on mid-cap stocks as valuations there are at a discount to large caps,” says K Ramanathan, chief investment officer, ING Mutual Fund.

Leverage can be disastrous when equities obey the laws of gravity. In volatile times, futures, too, may emerge as the weapons of mass destruction, as envisaged by legendary investor Warren Buffett. Given the circumstances, it’s better to cut down naked derivative exposures and avoid taking any positions using borrowed money.

If you are not sure of the equity markets’ future in the near term, change all your lump-sum investments in mutual funds and other vehicles into systematic investment plans (SIP) to ensure that you don’t commit the mistake of trying to time the market. If you need some time to think before you act, you can consider buying insurance by way of purchasing index ‘put’ options. Of course, there is a cost attached to it.

THINK BEFORE YOU JUMP

Equity investing is an art as well as science. Especially in cases, where you decide it on your own, it becomes a tight-rope walk. “One should stick to strong conviction ideas with strong fundamentals. Fundamentally, strong companies are last to fall and first to bounce back when the environment changes,” asserts Vinod Ohri, president-equity, Gupta Equities. It makes sense to revisit the portfolio with a single question in mind — If I am given money, will I buy the share I am holding now? If the answer to this question comes positive, your investment deserves a place in your portfolio. If you are not sure if you will buy it at the current price, probably, it’s the time to bid adieu to that stock.

“Retail investors need to at least check business performance of companies in which they have invested, by going to the exchange website,” says Sunil Shah, director-equities, Indsec Securities & Finance. This is even more important in case of small-, and mid-cap companies, where there is no or limited research coverage. “As a broad rule, one can decide to stay with mid-cap stocks, enjoying single-digit price earning multiples and book profits, where the mid-cap stocks quote at price multiple of more than 20,” adds Mr Shah.

If you are not sure as to how the global crisis will unfold, you can choose to convert some of your equities into short-term fixed income instruments to earn decent ‘return on capital’ without compromising on ‘return of capital’.

Strategies

As of now, the domestic economy is in shape. Some experts prefer to restrict their equity exposure to ideas that revolve around domestic themes such as consumption and infrastructure. One can cut his exposure on export-oriented companies.

There is another advice to stick to companies with least leverage. This may come handy if the credit crisis spread beyond European countries. Look at only those companies with no or nominal debt on books. To play safe, one can avoid companies that are still in the capital expenditure mode and are expected to guzzle a good amount of cash.

Looking for price supports is a very much a normal act of savvy equity investors. Some call it special situations-investing. Investing in fundamentally strong companies where due to open offer or some other corporate action there exists a safety net is a good bet in weak markets. Delisting offers also can be considered here.

Ultra-conservative investors looking at equity can resort to a capital protection strategy. If you have, say Rs 5 lakh, to invest with a three-year time-frame, invest Rs 4 lakh in fixed deposits, earning an 8% return and invest the rest in diversified equity funds with a good track record using systematic investment plans. Here, your investments in fixed deposits will ensure that you get Rs 5 lakh back at the end of three years. At the same time, your equity investments will earn superior returns for you.

Ultimately, investors will be better off sticking to their asset allocation. Of course, one can take tactical calls of moving from one type of equities (such as mid-caps) to another type (large-cap). One should never forget that all bear markets start with correction. Greed leads to investors throwing good money after bad ideas. It is time to have some conviction in the Indian growth story and buy quality businesses at attractive prices slowly and steadily.

http://economictimes.indiatimes.com/articleshow/5966749.cms

The Dark Secret of the Best-Performing Stocks

By Matt Koppenheffer 

March 25, 2010 | Comments (19)

At this point, I've seen this list of the past decade's top-performing stocks so many times that I can recite most of them from memory. But there's good reason to keep picking apart these top performers, because any one of them had the potential to turn a mediocre portfolio into a market-beater.

Here's a peek at 10 of the top 25 performing stocks of the past decade:

Company	Price Change Jan. 1, 2000, to Jan. 1, 2010
Bally Technologies	5,975%
XTO Energy (NYSE: XTO)	5,917%
Southwestern Energy	5,776%
Clean Harbors	4,669%
Deckers Outdoor	3,775%
Jos. A Bank Clothiers	3,196%
Range Resources	2,246%
FTI Consulting	2,022%
CarMax	1,997%
Terra Industries (NYSE: TRA)	1,960%

Source: Capital IQ, a Standard & Poor's company.

The list may look pretty familiar, but what you may not know is that these companies, and many of the decade's other top performers, share a dark secret.

Skeletons in the closet
If you're thinking I'm going to say that all of the companies above were small and that they beat the pants off of large, well-known stocks like Procter & Gamble (NYSE: PG) and Disney(NYSE: DIS) (which returned 10.7% and 10.3%, respectively), I'm not. It's true, but a number of my colleagues have already done a great job highlighting that very important aspect.

So what is the secret, then? Instead of simply telling you, let's take another look at the companies listed above and see if you can figure it out.

Company	Price Change Jan. 1, 1998, to Jan. 1, 2000	Return on Equity in 1999	Debt-to-Equity in Early 2000
Bally Technologies	(84.1%)	Unprofitable	Negative book value
XTO Energy	(45.5%)	19.5%	340.8%
Southwestern Energy	(49%)	5.3%	140.5%
Clean Harbors	(20%)	Unprofitable	230.2%
Deckers Outdoor	(65%)	5.3%	14.6%
JoS. A. Bank Clothiers	(44.2%)	3.2%	35.9%
Range Resources	(80.4%)	Unprofitable	417.5%
FTI Consulting	(60%)	2.9%	206.7%
CarMax	(74.3%)	Unprofitable	62.2%
Terra Industries	(88%)	Unprofitable	77.7%

Source: Capital IQ, a Standard & Poor's company.

Now what would you say ties all of these top-performing companies together?

If you said something to the tune of "they looked like terrible investments," then you get a gold star. Even a quick glance at that chart would send chills up the spine of most fundamental-oriented investors. Many of the companies were unprofitable, the ones that weren't produced lackluster returns on capital, and quite a few were swimming in debt.

Maybe it's not so surprising, then, that the market hated these stocks at the time. Those are some massive declines posted above, and bear in mind that this was over a period when the S&P jumped more than 50%.

Time to scrap everything we know?
Does this mean that we should forget about looking for high-quality companies trading at reasonable prices in favor of looking in the garbage bin? I don't think so.

The list of the decade's top-performing stocks isn't the only place where lousy returns on equity and high debt levels show up. You can also find numbers that look like that on a list of the decade's bankruptcies.

According to Capital IQ, there were 667 publicly traded companies with market caps above $10 million that filed for bankruptcy over the past decade. In 2000, only 22 of those companies could claim a return on equity above 15% and debt-to-equity below 50%. The rest of the companies that went belly up sported numbers that looked a lot like those in the chart above.

In other words, taking fliers on companies with ugly-looking financials could land you a massive winner, but it also gives you a big chance of taking hefty losses.

Swing at good pitches
By sticking to investing in reasonably capitalized and solidly profitable companies that are trading at attractive prices, we may miss out on some of the biggest winners, but we also vastly reduce the chances of sticking ourselves with clunkers headed toward bankruptcy.

And don't worry, there are still plenty of opportunities for big returns. With gains of 9,211% and 7,024%, respectively, Green Mountain Coffee Roasters (Nasdaq: GMCR) andHansen Natural (Nasdaq: HANS) were two of the very best performing stocks of the decade, and both would have fit a "high quality at a reasonable price" strategy back in 2000.

Of course, even companies that produce good-looking numbers can end up being poor investments. Ten years ago, the numbers all seemed to line up for American Capital(Nasdaq: ACAS) and Ethan Allen Interiors, but both stocks ended up getting clobbered.

That's why the team at the Motley Fool Hidden Gems newsletter not only focuses on companies that produce attractive financial returns, but also digs in to evaluate intangibles like competitive moat, growth opportunities, and management effectiveness. The team's research recently led it to buy shares of a fashion retailer for the newsletter's real-money portfolio.

http://www.fool.com/investing/small-cap/2010/03/25/the-dark-secret-of-the-best-performing-stocks.aspx