There's an old mechanical investment method called "Dogs of the Dow Jones". American investors used to buy the five dividend-paying stocks in the Dow Jones, with the worst capital losses of the past 12-month. They would hold until dividend was paid. Then, they would rebalance by selling off the best performer (in terms of capital gains) and replacing it with the worst performing dividend-paying stock. This process would be repeated.
Apparently it used to yield a total return slightly in excess of the passive index return plus the dividend yield. There are two reasons for outperformance. One is that, the dividend yield would be higher than normal. The second reason was that a cyclical recovery could lead to a turnaround in share price.
This strategy became less popular once the infotech industry got going. Most IT companies don't pay dividend. They prefer to reinvest in their own growth. However, if the cyclical effect is strong, it is possible that buying the five stocks with the worst 12-month capital losses could be a winning strategy, due to capital gains alone.
This strategy looks for a cyclical turnaround. The opposite concept is momentum investing. Momentum investors assume outperforming businesses possess some competitive advantage. A momentum investor will buy the stocks with the best capital gains in the hopes of continuing high returns.
Looking at the Nifty right now, the five biggest capital losers of the past 12-month are Cairn (-45 per cent), Tata Steel (-29 per cent), HCL Tech (-28 per cent), NMDC (-27 per cent) and PNB (-26.7 per cent). The five biggest gainers of the past 12 months are Lupin (94 per cent), Cipla (73 per cent), Sun Pharma (69 per cent), Kotak Mahindra Bank (61 per cent) and Maruti (59 per cent).
Both these are interesting sets. Take the losers first. Cairn is facing one of the largest tax demands in history. It has also been hit by the cyclical fall in crude and gas prices. Tata Steel has issues with its European operations. Globally, as well as in India, the iron and steel commodity market is in bad shape. In India, it has been hit by mining bans as well as low demand. NMDC has been hurt by similar considerations given its exposures to commodities and especially, to iron. HCL Tech is one of several IT majors suffering from industry-wide slowdown. Punjab National Bank (PNB) has delivered poor results, and there are worries about its asset quality.
Now the winners. Three of these are pharmaceutical companies. Pharma is consistently the highest valued industry on the Indian stock market. Apart from other considerations, it is a non-cyclical industry. However, all pharma exporters have to work through stringent quality controls and also frequently face Intellectual Property related issues and challenges.
In contrast to PNB, Kotak Mahindra Bank has done well - the divergence in performance between public sector and private sector banks shows up - the sixth and seventh best performers are YES Bank (57 per cent) and IndusInd (56 per cent). Maruti has increased sales volumes and also benefited from a favourable rupee-yen relationship. The yen has weakened, reducing the rupee value of payments to the promoter.
The five stocks with poor returns will be driven by cyclical considerations. Most advisories suggest that turnarounds are some distance away. Three of the five best performers are non-cyclical. But they are all highly valued. Investing in the "losers" would mean holding for the long-term. But the potential gains could be more due to the low base effect. The "winners" are unlikely to have major downsides but high base prices could reduce returns.
Apparently it used to yield a total return slightly in excess of the passive index return plus the dividend yield. There are two reasons for outperformance. One is that, the dividend yield would be higher than normal. The second reason was that a cyclical recovery could lead to a turnaround in share price.
This strategy became less popular once the infotech industry got going. Most IT companies don't pay dividend. They prefer to reinvest in their own growth. However, if the cyclical effect is strong, it is possible that buying the five stocks with the worst 12-month capital losses could be a winning strategy, due to capital gains alone.
This strategy looks for a cyclical turnaround. The opposite concept is momentum investing. Momentum investors assume outperforming businesses possess some competitive advantage. A momentum investor will buy the stocks with the best capital gains in the hopes of continuing high returns.
Looking at the Nifty right now, the five biggest capital losers of the past 12-month are Cairn (-45 per cent), Tata Steel (-29 per cent), HCL Tech (-28 per cent), NMDC (-27 per cent) and PNB (-26.7 per cent). The five biggest gainers of the past 12 months are Lupin (94 per cent), Cipla (73 per cent), Sun Pharma (69 per cent), Kotak Mahindra Bank (61 per cent) and Maruti (59 per cent).
Both these are interesting sets. Take the losers first. Cairn is facing one of the largest tax demands in history. It has also been hit by the cyclical fall in crude and gas prices. Tata Steel has issues with its European operations. Globally, as well as in India, the iron and steel commodity market is in bad shape. In India, it has been hit by mining bans as well as low demand. NMDC has been hurt by similar considerations given its exposures to commodities and especially, to iron. HCL Tech is one of several IT majors suffering from industry-wide slowdown. Punjab National Bank (PNB) has delivered poor results, and there are worries about its asset quality.
Now the winners. Three of these are pharmaceutical companies. Pharma is consistently the highest valued industry on the Indian stock market. Apart from other considerations, it is a non-cyclical industry. However, all pharma exporters have to work through stringent quality controls and also frequently face Intellectual Property related issues and challenges.
In contrast to PNB, Kotak Mahindra Bank has done well - the divergence in performance between public sector and private sector banks shows up - the sixth and seventh best performers are YES Bank (57 per cent) and IndusInd (56 per cent). Maruti has increased sales volumes and also benefited from a favourable rupee-yen relationship. The yen has weakened, reducing the rupee value of payments to the promoter.
The five stocks with poor returns will be driven by cyclical considerations. Most advisories suggest that turnarounds are some distance away. Three of the five best performers are non-cyclical. But they are all highly valued. Investing in the "losers" would mean holding for the long-term. But the potential gains could be more due to the low base effect. The "winners" are unlikely to have major downsides but high base prices could reduce returns.
The author is a technical and equity analyst