All Time High’s: Sensex Stocks

2015 is over and hence time for introspection. Sensex is down 6% for 2015. However, what can be of interest is that it is down 13% from its All Time High (ATH) which was 29,681 achieved on 29^th January 2015.

ATH is simply defined as the historic high for a stock or index. Meaningful markets and stocks consistently establish new ATH’s reflecting growth and opportunities. While stagnant markets/companies may struggle to re-conquer their ATH’s and can thus test investor patience (Japan for eg).

For Sensex, let us first focus on the bad news. Here is a list of 7 stocks that had their ATH’s way long back:

 Wipro, the IT giant, achieved its historic high some 16 years back and is down 34% since that level. In other words, it would need a jump of approximately 52% to catch up with is historic high which it has been struggling to do for the last 16 years. This probably represents an outlier.

Next in the list is a telecom giant (Bharti Airtel) that saw its peak glory some 8 years back and is down 40% since that level. It would need a climb of 66% to reach its ATH again.

However, from a gap point of view, Tata Steel is the worst performer with its current stock price representing a gap of 72% compared to its all-time high achieved in December 2007. In other words, it would need a 350% appreciation in its stock price to scale back to its ATH, a very unlikely scenario. BHEL, a public sector company, is not way behind in terms of the gap. Its current stock price represents a 70% scale back compared to its ATH achieved in November 2007, just before the onset of the Global Financial crisis.

A perusal of this list reveals dominance of public sector companies, with 3 out of 6 in the list. 

Before we jump to the good news, let us also see a moderate version of Sensex stocks i.e., stocks that had their ATH in 2014, not so far away as the first list.

High on this list is ONGC, a public sector oil company, whose stock plunged 50% from its ATH. It is now 19 months since that peak was achieved and it requires a stock rebound of 200% from its current level to get back to its peak. Closely following this is another public sector company, GAIL whose price gap between its ATH and current price is 32%. The best in this category is Bajaj Auto, the auto giant that achieved its ATH during November 2014 and is only 7% away from its historic peak. It only requires a rebound of 7% to touch its ATH, which is quite a possibility.

Now comes the good news i.e., list of Sensex stocks that touched its ATH’s during 2015. Surprisingly, this list includes Sensex itself!

Tata Motors trails this list with the steepest gap at 36%. It achieved its all-time high in January 2015 and now needs a rebound of 57% to close the gap. There is only one public sector company (Coal India) in this coveted list. Sensex, the index, also achieved its ATH in January 2015 and now has a gap of 13%. It will need a 15% rebound from the current level to test new heights, a good possibility in 2016.

The final comments should go to Maruti Suzuki, the auto giant. It enjoys the best performance of the lot on this key metric. It touched an ATH during November 2015 and is only 3% away from that level. With a 3% rebound, it can set a new high.

It is important for bellwether stocks to touch new highs and not languish on old glory. Stocks touch new highs primarily on performance though speculation cannot be ruled out. While speculation can set the fire, the continuance depends on fundamental performance. Being part of Sensex, these stocks enjoy high liquidity and patronage from foreign investors as well. They are well covered by analysts. While constructing a portfolio/investment strategy, it is important to note whether stocks are touching new highs. It is better to avoid stocks that came away a long mile from their historic highs and shows no signs of getting there. While these stocks will still be part of index funds or ETF’s, they need not be part of an active portfolio strategy.

The connect between market leadership and wealth creation

Does it pay to invest in companies that enjoy high market share? How to measure the effect of market share?

In the online media communications industry, Google has a market share of 40%. Tencent Holdings has a market share of only 7%. Both have created extraordinary wealth to its shareholders. Google stock returned 20% annualized and Tencent 31% annualized during the last five years.

Wal-Mart enjoys an astonishing market share of 57%, but returned only 4% annualized in terms of its stock performance, while Costco with a market share of less than one-third that (18%) has provided 18% annualized return.

So, does it pay to invest in a market leader? 

The top 15 market leaders, in general, seem to have delivered value as measured by their stock price annualized return. Only two (Gazprom and HP) seems to have deleted value. Despite being the world’s largest extractor of natural gas and possessing the world’s largest gas transport system (158,200 milometers of gas trunk lines), Gazprom declined in value over the last 5 years. Similarly, HP headquartered in Palo Alto, California provides a variety of hardware and software products to a diverse range of customers and has significant brand pull. Nevertheless, it ended up on the losing side, on the stock price appreciation metric.

Barring the two, most of the others in the list boast of excellent performance proving the connection between market leadership and wealth creation. Notable among them are Google, Amgen, Costco, Microsoft, Intel, Starbucks, Gilead Sciences and American Express. Google derives profits mainly through Adwords (an online advertising service that places ads adjacent to search results and on blogs and other webpages). Google has moved beyond from just being a search engine, to commanding a chain of products through innovation, acquisitions and partnerships. For example, it partners with major electronics manufacturers in the production of its Nexus devices. Amgen is the world’s largest independent biotechnology firm, and its largest selling product lines are drugs related to preventing infections in patients undergoing chemotherapy (Neulasta/Nuepogen). Costco is the second largest warehouse, after Walmart, operating on a membership-only basis and has extensive reach within US, as well as other countries, such as Canada, UK, Australia, Mexico, Taiwan, South Korea, and Japan. Starbucks is the largest coffeehouse company in the world, with nearly 23,000 stores in 65 countries.

Company	Sector	Market Share	Return*
Wal-Mart Stores	Mass Merchant / North America	57.4%	3.9%
Google	Internet Media	40.7%	19.4%
Gazprom	Energy Exploration & Production / Europe	24.9%	-3.4%
Amgen	Biotech	21.0%	20.2%
Procter & Gamble	Household Products	19.6%	3.7%
Costco Wholesale	Mass Merchant / North America	17.8%	18.3%
Lenovo Group	Computer Hardware	17.1%	6.4%
Microsoft	Software	16.7%	12.6%
Hewlett-Packard	Computer Hardware	16.6%	-9.5%
Intel	Semiconductor Devices	15.8%	9.4%
Rosneft	Energy Exploration & Production / Europe	13.4%	3.6%
Starbucks	Restaurants / North America	13.2%	34.8%
Gilead Sciences	Biotech	12.8%	40.7%
American Express	Credit & Debit	12.7%	12.0%
MSCI World			9%

 *CAGR (Sept 2010-Sept2015)

And does it hurt to invest in market laggards?

It appears that there is cost to having low market share. Four out of bottom 15 in terms of market share witnessed decline in stock value over the last 5 years. (HP, China Shenhua Energy, Nippon Steel, and Sinopec). Also, 10 out of bottom 15 seem to have underperformed the MSCI world index. Low market share could also imply a crowded market and therefore the pressures of such a system could be affecting the performance. Prudential financial, AXA and Allianz asset management seems to be the exceptions to the trend, and have provided positive value growth to their investors over the last 5 years.

Company	Sector	Market Share	Return*
ConocoPhillips	Energy Exploration & Production / North America	4.3%	1.8%
Siemens	Electrical Equipment	4.2%	1.3%
Hewlett-Packard	IT Services	3.9%	-9.5%
Deere	Machinery	3.7%	1.2%
Allianz	Asset Management	3.6%	11.1%
BASF	Chemicals / Global	3.6%	8.1%
Hitachi	Electrical Equipment	3.4%	10.5%
China Shenhua Energy	Coal Mining	3.4%	-9.3%
Nippon Steel & Sumitomo Metal	Steel	3.1%	-5.3%
Prudential Financial	Life Insurance	3.0%	17.0%
PepsiCo	Food Manufacturing	3.0%	7.3%
Sinopec	Chemicals / Global	2.9%	-5.6%
AXA	Property & Casualty	2.8%	11.0%
AXA	Life Insurance	2.7%	11.0%
Coal India	Coal Mining	1.6%	0.7%
MSCI World			9%

 *CAGR (Sept 2010-Sept2015)

Market Leaders as Wealth Creators

Significant wealth creators also enjoy good market share in most cases. Notable among them are Google, Amgen, Gilead Sciences, Starbucks, Costco, Toyota, Boeing, etc. Gilead Sciences tops the wealth creator list with an impressive 40% annualized return to its shareholders during the last five years. The American biotechnology company that discovers, develops and commercializes therapeutics, concentrates primarily on antiviral drugs to treat patients infected with HIV, hepatitis B, hepatitis C, influenza and pulmonary diseases. It is followed by Starbucks, with an annualized return of 35%. The Internet media sector, which is dominated by Google, has also produced another significant wealth creator in Tencent Holdings (China), which provided an annualized return of 30% with only a 6.6% market share. The company represents the Asian face of internet boom by providing media, entertainment, internet and mobile phone value-added services, and it also undertakes online advertising services in China.

Company	Market Share	Sector	Return*
Gilead Sciences	12.8%	Biotech	40.7%
Starbucks	13.2%	Restaurants / North America	34.8%
Tencent Holdings	6.6%	Internet Media	30.7%
Nike	8.5%	Apparel, Footwear, and Accessories	25.1%
Airbus Group	11.5%	Aerospace & Defence	23.7%
Amgen	21%	Biotech	20.2%
Google	40.7%	Internet Media	19.4%
Toyota Motor	11.6%	Automobile OEM	18.4%
Costco Wholesale	17.8%	Mass Merchant / North America	18.3%
Anheuser-Busch inBov	7.9%	Beverages	17.1%
Prudential Financial	3%	Life Insurance	17%
Wells Fargo	10.3%	Banking / North America	15.4%
Marriott International	5%	Lodging	15.1%
Boeing	12.6%	Aerospace & Defence	14.5%
SJM Holdings	12.4%	Casinos	13.5%
MSCI World			9%

*CAGR (June 2010-Sept2015)

Market Leaders as Wealth Destroyers

Wealth destroyers mostly come from bricks and mortar industry spanning across sectors such as steel, coal mining, chemicals, machinery and energy. IBM and HSBC are the exceptions, with the former being a software company and the latter a banking company. Arcelor Mittal’s share price plunged the most in this study, with a negative return of 27%, followed by Guodian Technology in the renewable energy industry. Both command a market share of 6% and 5%, respectively. Arcelor Mittal is the world's largest steel producer, with an annual crude steel production of 98.1 million tons as on 2014, which is 10% of the world’s steel, and Guodian is one of the five largest power producers in China, engaged in development, investment, construction, operation and management of power plants.

Company	Market Share	Sector	Return*
ArcelorMittal	6%	Steel	-27.3%
Guodian Technology & Environment	4.9%	Renewable Energy	-26.8%
Hewlett-Packard	16.6%	Computer Hardware	-9.5%
China Shenhua Energy	3.4%	Coal Mining	-9.3%
Banco Santander	6.9%	Banking / Europe	-6.4%
Sinopec	2.9%	Chemicals / Global	-5.6%
Nippon Steel & Sumitomo Metal	3.1%	Steel	-5.3%
HSBC Holdings	6.4%	Banking / Europe	-5%
Caterpillar	5.6%	Machinery	-3.6%
Gazprom	24%	Energy Exploration & Production / Europe	-3.4%
Coal India	1.6%	Coal Mining	0.7%
Deere	3.7%	Machinery	1.2%
Siemens	4.2%	Electrical Equipment	1.3%
Halliburton	6.4%	Oil & Gas Service	1.3%
IBM	6.6%	Software	1.6%
MSCI World			9%

*CAGR (June 2010-Sept2015)

The No.2 Syndrome

Sometimes, the second largest market share holder can actually rank better in terms of wealth creation than the leader. Such trend cuts across several sectors. For eg., though Wal-Mart enjoys a dominant market share of 57% as compared to Costco, the warehouse group with the second highest market share of 17.8%, the annualized stock price performance of Costco is 21.5% compared to 5.3% for Wal-Mart. Similar things can be observed with Google Vs. Tencent, Amgen Vs. Gilead, P&G Vs. Unilever, Las Vegas Vs. SJM Holdings, Bank of America Vs. Wells Fargo, Coca-Cola Vs. Anheuser, Boeing Vs. Airbus, etc. In all these cases, the company with the second highest market share performed better than the sector leader in terms of wealth creation. There is apparently a discount for being the leader in some cases!

Company	Market Share (%)	Price Performance* (%)	Sector
Wal-Mart Stores (1)	57.4%	5.3%	Mass Merchant
Costco Wholesale (2)	17.8%	21.5%	Mass Merchant
Google (1)	40.7%	23.2%	Internet Media
Tencent Holdings (2)	6.6%	35.4%	Internet Media
Amgen (1)	21.0%	22.1%	Biotech
Gilead Sciences (2)	12.8%	43.9%	Biotech
Procter & Gamble (1)	19.6%	3.8%	Household Products
Unilever(2)	8.5%	9.3%	Household Products
Las Vegas Sands (1)	12.7%	6.0%	Casinos
SJM Holdings(2)	12.4%	14.3%	Casinos
Bank of America (1)	12.2%	4.6%	Banking / North America
Wells Fargo (2)	10.3%	16.9%	Banking / North America
Coca-Cola (1)	8.8%	7.5%	Beverages
Anheuser-Busch inBov  (2)	7.9%	18.3%	Beverages
Boeing (1)	12.6%	16.5%	Aerospace & Defence
Airbus Group (2)	11.5%	25.0%	Aerospace & Defence
Siemens (1)	4.2%	2.8%	Electrical Equipment
Hitachi (2)	3.4%	12.1%	Electrical Equipment

*CAGR (June 2010-Sept2015)

Conclusion

In trying to relate market leadership to wealth creation, we can see three categories:

Clear Winners (Best): Those that enjoy very high market share/leadership and have created excellent wealth for their shareholders (Amgen, Google, Costco, Microsoft)

Clear Losers (Worst): Those that have low market share and have created the least wealth or even destroyed wealth for their shareholders (Nestle, Siemens, Conco Philips, etc)

In-betweens (Better, Good, Hmm, Bad): Instances of high market share coupled with low wealth creation and vice-versa.

It is important to translate market leadership to wealth creation. In the absence of that association, sometimes market leadership can be more of a burden than a benefit.