Thread by @prabhakarkudva

Study the biggest winners and losers of the last CY and the following patterns stand out.

A thread.

The winning stocks can be categorized into the following types.

1. Story Stocks - These go up on some story or narrative that there is something exciting going to happen in these names. The current reported numbers are nothing special or not even there yet. Stocks like TTML, Orient Green, JSW Energy etc fall in this category.

They go up on stories like Tata group's superapp, EV, power reforms etc. The numbers may or may not come but the takeaway is to understand that it's the nature of the market to try to price things in even before they happen.

2. Earnings Explosions - These went up on a substantial improvement in earnings. Often either the sales, margins or eps exploded. If all three did then even better. These are the re-rated stocks. Stocks like Nahar, Globus, Trident, Angel & midcap Tech fall into this category.

The takeaway here is - if you see this list almost every one of them belongs to the neglected group. Neglect + Earnings Explosion is a potent combination. I wrote more about it here: marketsense.substack.com/p/the-most-pow…

3. Special Situations - This category doesn't disappoint most years. This year wasn't different. This primarily includes demergers and management changes. Examples include CG Power, Poonawala, Tejas and many more.

The triggers here are a combination of change (sometimes just the name :) ) - which the market loves and always gets excited about - and improvements in numbers, whether balance sheet, P&L or cash-flow.

4. The final category is IPOs - Given their low floats, no over-head resistance when combined with either some story or some earnings - leads to big winners. Eg. AnuRasayan, Clean, Devyani, Craftsman to name a few.

The bigger takeaway for me and for you all is that these four categories pick up most of the winners not just in 2021 but most years.

What about the losers? My observation says almost 90% of these fall in just two categories.

1. Earnings Deterioration - As you would expect - if earnings explosion leads to big winners, you actually dont need a huge earnings deterioration to lose big - just a slowdown in earnings compared to the last few quarters will ensure there is a persistent headwind for the stock.

Of course if there is a serious deterioration they will most definitely land up in the worst performers. This year that award went to the microfinance/SFB types names primarily. Their earnings worsened materially and punishment was meted out with every passing quarter.

2. Corporate Governance - The other category which sees bad perf in any year are those where certain corporate governance issues have cropped up. Like clockwork, if you find a small hint of corporate governance issues you can be rest assured that the stock will be punished.

Corporate governance issue doesn't necessarily mean fraud but also issues within top management. Eg. Ujjivan, Spandana and the most recent RBL Bank. Often earnings deterioration and corp gov issues come to fore together. So one could as well categorize them as one.

If you find any other broad category (not exception cases) that defines winners or losers, feel free to add.