smallcase in Focus – December 2023

Analyzing the outperformance of the CANSLIM-esque smallcase

In one of our previous newsletter editions (Dec ‘22), we highlighted the underperformance of CANSLIM smallcase exploring all possible reasons behind its lackluster performance. Please read the blog post here. Well, we have come full circle, because exactly after one year, CANSLIM is one of the best-performing smallcases within our suite. It will be interesting to analyze the other side of the coin, shall we?

Refer to the chart below. The previous blog post was written during the shaded region in red. And look how things have changed for the smallcase shortly after our post. 

Again, it is tied to the global resurgence of growth stocks, as indicated by the MSCI World Growth Index, where the index is up 30% from 2023, until Nov 30.  

For this analysis, we will take the micro approach and dissect things that have particularly worked for our smallcase. In the previous write-up, we discussed the sectoral laggards that pulled down the portfolio performance. Now, since there is a reversal, the question is have those sectoral laggards seen any change in fortunes?

As far as the table above is concerned, the way to interpret it is straightforward. Since Dec ‘21, all the stocks’ median returns that belong to the Consumer Staples segment in the smallcase is -19.8%. Similarly, for the other period, i.e. Dec ‘22 to Nov ‘23, the median returns for the consumer staples segment is 64%

There are clear outliers, aren’t they? Let us go through a few of them and discuss the reasons behind the change in performance:

1. Consumer Staples – This sector saw the biggest divergence in performance from ~-20% to ~64%. This was entirely driven by one stock, Varun Beverages. While we do not have any discretion relating to stock selection, our model was able to catch a relevant stock that exhibited both growth and momentum characteristics. As a side note, Varun Beverages is a part of a couple of non-model smallcases, where we have observed that the company is on a strong footing with extremely encouraging results.   

2. Consumer Discretionary – Again, this sector story was a result of the change in the business cycle. We had two stocks in the smallcase that underperformed. Post which three stocks made up for the poor performance of the other two. These stocks are – CIE Automotive India, Safari Industries, and Kalyan Jewellers. All of them have witnessed tailwinds in their respective industries. After Dec ‘22, the demand scenario has strengthened for consumer discretionary companies with inflation trending downwards. The strong recent festive demand was also a positive contributor to the sector’s outperformance.       

Broadly, these two sectors have been the game changers, driving the overall performance of the smallcase. Financials and Materials have also seen an improvement. However, the degree of change is not too drastic. On the flip side, you must be thinking, what about sectors like Industrials, Utilities which have turned for the worse? Sure, let me address that. 

• Industrials – From the outside, it seems as if we have done something wrong with this sector, however this drop in median returns is a result of profitable existing stocks going out of the smallcase. The star performer for us was Apar Industries, which delivered close to 70% returns within six months. From Dec ‘22, we have had 9 industrial companies in the basket, out of which we continue to hold 6 till Nov ‘23. The remaining 3 stocks went out as they failed to meet our model criteria, therefore causing a drop in the current median returns. 

• Utilities – We had one stock, NTPC in the smallcase, for two quarters. However, due to a lack of price momentum, the model suggested we drop the stock. 

The sectoral weightage trend is another thing we can look at. Since Dec ‘22 onwards, the smallcase weightage has changed significantly. As you would have noticed in the earlier table as well, Industrials have continued their good run. As a result, its weightage has also been on the rise. Consumer Discretionary has also seen an uptick in the weightage. Lastly, Consumer Staples has been a one-stock army.     

To set this in context, we particularly wanted to do a follow-up to the previous post, to convey an important message. And that is the dynamic nature of the markets. The same factor that underperformed in one year, bounced back and delivered top performance the very next year. As a research house, we see many investors getting dejected and sending us queries when a particular smallcase does not deliver the best returns for a while. However, during such times, the best one could do is to be patient. As the great Charlie Munger used to say, ‘Patience is not just a virtue; it’s a strategy. Success often requires waiting for the right moment to act.’

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Windmill Capital Private Limited – Research Analyst – SEBI reg. no: INH200007645; Compliance Officer – Ajoy Bharadwaj, Phone Number – 8296014433; Email Id – compliance@windmill.capital; Support email id – notifications@windmill.capital