Wednesday, May 4, 2011

How great companies outperform index over time?

Many a times so called analysts mark companies in FMCG and Pharma sectors as defensive. But if we look at the returns generated by these companies over long term, they are many a times much better than the returns generated from index. Today, I will describe two good companies from FMCG sector which have shown the same kind of characteristics over the last 10 years. The first is Nestle and the other one is Glaxosmithkline Consumer Healthcare. If you look at the returns generated by these companies over the last ten years, they can be summarized as shown in the following table:

* Average price
CompanyPrice 2002-03Price 2007Price 2011
Sensex30001800019000
Nestle50011003500
Glaxo Consumer2505502200

You can see that during the bull market till 2007, both the companies underperfomed the Sensex by a hugh margin but after 3 more years, they are now outperforming the index. The Sensex generated returns of more than 40% compounded annually between 2002-03 and 2007 and many of the stocks like L&T, Reliance and BHEL went up by more than 25 to 50 times. The returns generated from both these stocks were of the order of 15-20% at best during those times. But the situation has changed over the last three years, all the stocks that generated great returns earlier are still trading 30-40% below their 2007 peak while these companies multiplied their returns and generated more than 40% returns compounded annually during the last three and a half years while the Sensex hasn't moved much. It is just in hindsight that somebody would have bought L&T and Reliance in 2003, sold them in 2007 and bought Nestle and Glaxo from that money. But buying good companies at great prices never turns out to be a bad deal.
Image: renjith krishnan / FreeDigitalPhotos.net
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6 comments:

Steve said...

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Karthikraja K said...

Can NTPC at CMP is value buy or great
Buy? Can you try write post on NTPC? I hv been averaging from 160 levels.

Chinmay said...

I would consider it a value buy with long term horizon of 5-10 years. It is already giving dividend of more than 5%. So to get satisfactory returns of 8-9% to beat inflation, you need just 7% capital appreciation per year, i.e. double the price in 10 years which is not unrealistic for a well managed power company.

Karthikraja K said...

Hi Chinmay
I understand. Since there will be hurt in EPS due to CERC order, Dividend yield may not be maintained. Pl share your views.also why other Utility companies are rating very high PE though NTPC is such a well managed and Investor friendly.

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