10 Stock PSU Banks Portfolio – 1st Year Performance Update

Caution: Lots of Graphs ahead. 🙂

Its been one full year since I started tracking PSU Bank stocks using a 10 stock portfolio. The catalyst for putting this portfolio in place was a feeling that PSU Banking space seemed relatively cheap (in November 2013) when compared to historical averages. I further hypothesized (or rather speculated) that over a period of next 5 years, this space would give better returns than broader markets.

And this speculative thought led to this portfolio and its quarterly tracking.

Portfolio Composition & Weightages

The portfolio which started off as an equally weighted one with all stocks sharing 10% of initial capital has moved a bit in last one year. It has now tilted more towards large caps due to better performance of larger banks than smaller ones over the last one year.
Banking Stock Portfolio Weightages
Current Banking Portfolio - Large Caps
Overall Portfolio Returns

So how has the portfolio fared in first year of its 5 year journey? To be honest, the results have been better than what I expected a year back. But that is not only because of low starting valuations or my stock picking skills. It is actually because of sudden rebirth of the Indian Bull Market. The portfolio has returned more than 42% (excluding dividends) and 45% (including dividends) in last one year. This is much higher than market returns of 35.8% in the same period.
Bank Portfolio Yearly Returns
Initial & Current Portfolio
Individual Stock Performances

But not all stocks have performed equally well. If we were to look closely at next graph, we will find that larger banks have performed much better than smaller ones. Four of the five large banks have given returns higher than market returns of 35.8%, whereas only one among the smaller ones has beaten market in last one year.

Portfolio Stocks Vs Index Returns
Quarterly Portfolio Performance

On a quarterly basis, the portfolio has been quite volatile. Though it wins the annual race comfortably, it should be noted that in 3 of the last 4 quarters, broader indices have beaten this portfolio!! It was only because of a jaw dropping 2nd quarter performance, that annual returns of the portfolio could beat the overall markets.

Quarterly Banking Portfolio Returns
This also shows that if someone was brave enough to go out and buy these banking stocks in February 2014, when they had come crashing down, the current returns would have been much higher the 45%.

It’s been rightly said that you need to show some Courage in Crisis (and take Cash-backed decisions) to make money in stock markets. But its tough to time the markets for average investors like. Period.

You can read more about the quarterly portfolio performance using links below:

Dividend Income from Portfolio

Apart from market beating capital appreciation, these stocks have also given dividends which are in line with expectations from PSU stocks. The ten stocks have cumulatively earned dividends of Rs 3173 on original investment of Rs 1 Lac. This gives a dividend yield of 3.17% to this portfolio – Decent by historical standards.

Banking Stocks Dividends
I know a lot of investors do not like stocks paying dividends as it means that company does not know what to do with its cash. But I personally prefer dividend paying companies. But this does not mean that I own all these shares in my personal or family portfolio. 🙂

So what should be the expectation for next 4 years? If one expects this portfolio to give similar returns (45%) for next four years too, then that would be wrong and over-optimistic. Under normal circumstances & assuming that common sense will prevail, maintaining a 45% rate for a portfolio of 10 stocks for five years is not possible – Assuming that we are not Warren Buffett. 🙂

But out there in markets, there are people who are ready to throw targets like 40,000 and 1,00,000 for Sensex over next few years at your face. They believe that we are getting ready for mother of all bull runs and its possible to earn 45% kind of return year after year.

My First Advice is to ignore them.

My Second Advice is to ignore my advice too. 🙂

Its your money and you have earned it the hard way. Don’t just depend on other people’s advice to take decisions about your money.


After 47.2% between Feb & May, PSU Bank Tracker Portfolio takes a breather with 10.9% – Update 3

It’s time for 3rd quarterly update of PSU Bank Portfolio. For benefit of those who do not know the whole story behind this tracking portfolio, I would briefly share the purpose of this portfolio:

In November 2013, like many others, I also felt that PSU Banks (as a group) were grossly undervalued and would give better returns than broader index in next 5 years. This portfolio tracks my gut feeling on a quarterly basis and was started with 10 stocks having equal weights.

Initial Portfolio PSU Banks

To know more details and thought process behind this portfolio, please read the first post in this series here. After this there have been 2 quarterly updates which can be found at below links:

In last 3 months, markets have been kind to PSU Banks (except to Syndicate Bank, which was in news for a bribery case linked to its Chairman). The portfolio has given a return of 10.9%, which is similar to that of broader index (11.3%).

Now if you compare this performance with that of previous quarter, i.e. 48% (against market’s 18% – details), then this one can be shrugged off as a pathetic one. But frankly speaking, I don’t think 10.9% in one quarter is a bad performance at all. Even if I am not beating the market, a performance which is better than after tax returns of safer, risk-free assets is acceptable to me.

In last 9 months, this portfolio has given returns of 40.5% (excluding dividends) and 43.7% (including dividends), which is better than Nifty’s 29% return in same period.

9 Month Banks Portfolio Returns
And surprisingly, it has been the larger banks which have performed better than than their smaller counterparts. And we always thought that smaller stocks moved more and faster.

Current Bank Portfolio Value

10 PSU Banks which pushed up Portfolio Returns by 47% in last 3 months!!

I still remember my last portfolio update post in February 2014. The post was titled PSU Banks are Losing Hell Lot of Money, and rightly so. After just three months of starting this portfolio, it was down -12% compared to Nifty’s -1.5% returns. 

It seemed that markets were hell bent on proving me wrong. 🙂

But thanks to Modi-Wave sweeping the country, last month has pushed up PSU banking stocks like a eagerly awaited IPO’s price in first week of its listing. And because of which, the overall 6 months returns of this portfolio has reached a stupendous 27%!!

And if you include dividends, it touches almost 29%. And this is against Nifty’s return of 15.8%. And here we are talking about big, country-wide banks and not small cap stocks.
PSU Bank Stock Returns 2014
Note – Returns based on prices upto 14th-May-2014

But before you put your money in PSU banks, please remember that on the business front, almost nothing has changed for these banks. Its only because of the so-called-hope, that these stocks have charged ahead. But having said that, prices these shares were trading sometime back were ridiculously low compared to historical valuations. And because expectation from this portfolio is to give better returns than index in next 5 yearsthis current out-performance should be taken as an exception and not as a rule.

But there are two simple yet important observations which I would like to highlight here:

  • Sometime in January 2014, concerns about asset quality were getting a lot of media attention & hence stocks of these banks reached almost absurd levels of undervaluation. But when the markets turned euphoric due to elections, it was the group of larger banks (SBI, BOB, PNB, etc) that bounced higher than smaller ones (Syndicate, Allahabad, Andhra, etc). This came as a surprise as I expected smaller ones to be more volatile and prone to movement due to market noises (even though asset quality of these smaller ones pose a bigger question than that of larger ones.)
  • Another interesting fact is that this Portfolio of government owned PSU banks is quite a volatile one. And as you can see in table below, quarter-on-quarter portfolio returns have fluctuated from -14% to +47% over the last 6 months. And that is a very high level of volatility. So, those who have difficulty sleeping at night due to stock markets, please avoid this group of stocks 🙂
PSU Banks Volatility

In last post, I had specifically mentioned (read speculated) that it was possible that these stocks would become volatile in coming quarter. Never thought volatility would be so high. 🙂

PSU Banks Prediction
A screenshot from previous post dated 15-Feb-2014
If you are interested in knowing further details of these 10 banks’ share-price performance & dividends in last 6 months, please click on image below to enlarge:

Detailed Portfolio Tracker – Last 6 Months – Click to enlarge

PSU Banks are Losing Hell Lot of Money!! 1st Quarter Portfolio Update

Shares of PSU banks have been bleeding for some time now. And unfortunately, some time back I had created a portfolio for tracking PSU banking stocks for next 5 years. Though it has only been 3 months, the fact is that the news is not good. 🙁

The portfolio is down 11.90% compared to Nifty’s 1.5% loss. And if you remove the contribution of dividends, then it further goes down to 13.90%. Pretty bad for 3 months… Isn’t it?

But lets remind ourselves of our original expectation from this portfolio

“[We] expect these stocks to collectively give better returns than index (Nifty50) in next 5 years.”

And with this being the first quarterly update, we still have 19 more quarter to look forward to. As we all know, asset quality issues and competition from more efficient private banks still remain. But the journey has just started. A snapshot of the portfolio is given below:
PSU Banks 1st Quarter Returns

In case you want to get more details, please click on the image below to enlarge:
Detailed PSU Banks Tracker Portfolio - Quarter 1 Update
Detailed PSU Banks Tracker Portfolio – Quarter 1 Update
Please note that I am separately tracking dividends as these government entities are quite liberal in doling out dividends to their shareholders (read: government), and hence we cannot neglect the contribution of dividends in this portfolio.

One of Stable Investor’s loyal readers Subhodeep made an interesting point in the earlier post:

“Some PSU Banks may yield progressively more than their own FDs over next 5-10 years. In other words, for someone looking for supplementing his monthly income, it might be better to buy stocks, which might end up yielding eventually 15% (on initial cost) or so in next 10 years, instead of buying a 5 or 10 year monthly income certificate (8% or 9% taxable return) in the same PSU Bank.”

And this yield on cost makes quite a lot of sense. I personally know people who now earn yields in excess of 600% every year (on-cost) on their investments made almost two decades back!! 

But lets go back to banking sector for now. 🙂 March 2014 is almost here and pretty soon, its possible that there might be some important announcement about new banking licenses. So, it is once again possible that few of the PSU banking names may see a volatile quarter of price movements.

But already down close to 15%, these stocks look quite attractive for long term. What do you say? Do you think these stocks would make more money than index in next five years? Or we are not going to see these stocks make new life time highs in next 5 to 10 years?

Do share your views.


Large Cap Nifty Stocks – Returns since our call in December 2011

Important: Don’t miss the last paragraph.

When we wrote Large Cap Nifty Stocks available at deep discounts in December 2011, we were very excited to find a number of great companies available at very cheap prices. And since the world as well as Indian economy hadn’t fully recovered, it was really common sense that one stuck with businesses which could weather the economic turmoil. We advised and bought a few of these large caps for our personal portfolios.

So after an year, when index has given 25% returns, we checked the performance of individual stocks. And we must say that we are more than happy to see around 15 stocks giving 40% + returns. But there are a fair number of duds too. There are 10 stocks which trade at discounts compared to December 2011 prices.

Large Cap Nifty Stocks Returns One Year
Nifty Stocks: One Year Returns (Dec 2011 – Dec 2012)
As of now, markets are trading at a PE of close to 19 and since markets have run up around 800 points in last 4 sessions, we are not sure if it’s a good time to pick stocks. We would rather wait and watch for the time being.

Caution: Our post might make you believe that we have good predictive capabilities. The fact is that we don’t. Why? Markets have risen 25% in last one year. So have all stocks representing the market. And as Warren Buffett said: A rising tide lifts each and every boat. You only find out who is swimming naked when the tide goes out.


10 good stocks to buy if markets correct

After witnessing substantial falls in good, stable stocks like Bharti & SBI (Almost 10% in 2 days), it occurred to me that what would happen if suddenly, the markets decide to correct? My first reaction was that I would start picking up good stocks.


But what actually happens is that when the markets fall, a large number of stocks start appearing on the buying screen. And because one is spoilt of choices, it becomes very difficult to choose among so many good stocks available at cheap prices. I faced a similar situation in early 2008 when all indices and stocks were falling like there was no tomorrow. But I was lucky to make some money during that period.

So how to be prepared for such falls?

The answer is to have a Stock Watchlist.

It is always wise to be ready to grab an opportunity rather than allowing opportunity to take us by surprise. A watchlist helps in this case. How? Once you create a watch list of great companies, you can monitor these companies. As share prices fall, sooner or later they will become good investments too (in addition to good companies).

Though we do follow a number of stocks mentioned in our Stocks We Stalk section, below is a list of stock which we would be delighted to buy in case market corrects and these stocks are available at lower prices –

Stocks to buy during market corrections

So now we know which stocks we want to buy in case markets correct. So what should we do now? Pray for a major correction, what else? 🙂

Dividend Analysis of stocks in Dead Monk’s Portfolio

We highlighted in an earlier postthat DMP would be built, primarily around dividend investing.  The core of DMP is made up of 5 stocks, namely ONGC, Clariant Chemicals (I) Ltd., Balmer Lawrie & Company, Graphite India, Tata Investment Corp Ltd. And let us confess. We did receive a few brickbats about our stock selection for forming the core of DMP. So here we would like to offer a few thoughts –
  • These 5 stocks are selected on basis of our (not your) risk appetite.
  • These stocks have been selected for long term (10+ years) and not for trading on daily or even monthly basis.
  • We do not expect these to be multibaggers. Though we would love them if they become one.
  • Selecting these 5 stocks in core does not rule out any further addition to core in future.
  • These stocks do not disturb our sleep at night.
  • We may or may not be comfortable with stocks current price.
  • We are comfortable and very happy with present dividend policy and consistency of these 5 stocks.

As you can see in above table, all 5 stocks have been consistent dividend payers for last 5 and 10 years.

But at present, multiples at which Clariant Chemicals (I) Ltd is trading are not cheap. A P/E of 17.5 is much above our liking and so is P/BV of 3.3 (Read a good analysis on Clariant at SN). As far as we are concerned, we would start accumulating once the stock comes down on these parameters. Tata Investments is primarily an investor in famous Tata companies which include cyclicals like Tata Motors and Tata Steel. Current P/E of 15.4 is not to our liking and we would rather wait before further buying.

Part from these 5, we also proposed 7 large cap stocks in DMP. Though we picked these stocks for their stability, a good and regular dividend payout can be an added advantage.

BHEL, NTPC, BOB and NHPC have quite tempting dividend yields considering the fact that initially, we picked them for their large capitalization and stability 
(Note- NHPC has not been as stable as we would have liked and has been consistently falling after its IPO. But we feel that at CMP of 18, it can be a decent bet for long term.)

As far as growth stocks are concerned (Yes Bank, Cairn India, GSPL & Sterlite Industries), we don’t expect such stocks to pay dividends (consistent or not) for a few years as they are in growth phases and would be reinvesting money in their own businesses.

Dead Monk’s Disclaimer – No matter how careful we are, as an investor, we will never be able to eliminate the risk of being wrong.

PS – Please do check ‘Stock Screenersin widget area on right side. These can be good starting points for shortlisting good stocks.

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Nifty Stocks and PEG Ratios

In our previous post, we saw that Indian markets are presently trading at PEG ratio of 0.97. We arrived at this figure by dividing current P/E of 16.7 by average growth rate (in last 18 years)of 17.1%.

For details, please check the post on Historical EPS Growth Rates & PEG Ratio of Indian markets.
In continuation of our analysis of PEG ratios, we calculated PEG ratios of a few Indian large cap stocks –
Click to enlarge
Some details/observations of our analysis are as follows –
  • We have chosen EPS growth rates to represent growth rates of a company. One can also use any other growth rates.
  • For each company, we have calculated 3 PEG Ratios –
    • Using latest EPS Growth Rates (2010-2011)
    • Using Average of all EPS growth rates in last 5 years
    • Using least positive EPS growth rates in last 5 years
  • Afterwards, we calculated another PEG for each company – Average PEG – which is an arithmetic average of previous three PEGs.
  • Normally, a PEG greater than 1 indicates an overvalued company, and less than 1 indicates an undervalued company. But we must understand that PEG is just a ratio and it should always be looked in conjunction with other ratios and numbers.
  • For instance, a company like Bharti has an average PEG of 0.33, which is quite an attractive number when looked at on a standalone basis. But if we consider that Bharti operates in a highly competitive industry; has loads of debt due to 3G fee payments and African expansion; has decreasing average revenues per user (ARPU) and has a negative PEG(!) for current fiscal, the number 0.33 may not look so attractive.
  • But there are also few companies like BHEL (0.59), PowerGrid (0.83), Tata Steel (0.40) and Tata Motors (0.42) which have considerable moat (competitive advantage & operations in industries having high entry barriers) and can be said to be available at good valuations. But once again, one should understand that stock like Tata Motors are rate sensitive and cyclical. And under current global circumstances, may slip further.
  • A company like Sterlite Industries (pegged by few as future RIL) is available at a ridiculous PEG of 0.19 (or 0.25, 0.08, 0.26). But that does not mean that it is going to become a future multibagger. Similarly, Maruti is available at PEG of 0.10(!)
  • Then there behemoths like SBI which may be available at outrageous mathematically calculated PEG of 6.6, but are worth investing as there current PEG stands at 0.54. But one should also consider rise in NPAs of SBI and other factors before investing.
So a Stable Investor understands that one should never rely on just one mathematical tool to arrive at any investment decision. Any number should always be looked in conjunction with other ratios and numbers.