IT stocks have been massive laggards in the last 2 yrs. Most of the front-line IT stocks topped out by the end of 2014 or early 2015 and have been laggards since then. Infosys was the only stock among the big-5 of Indian IT that hit an all time high earlier this year. Since then even that has crashed and is now trading at 52 week lows.
#Infosys hit all time high of 875 in Jan2011. Today stock is up 17% from there at 1025 in 5 yrs and 7 months.’Buy & hold bluechips anybody’?
— Sumit Sethi (@Sethinomics) August 19, 2016
The Infosys stock has given just 17% return in more than 5 yrs if one was unlucky to buy the peak in 2011. Even on adding dividends, this return remains under 30%.This is far lower than even the Nifty returns. Even fixed-deposits or govt bonds have given better returns during this time period.
Wipro on the other hand has given negative returns since end of 2010. Wipro shares closed at 491.25 on 31st Dec 2010 and as of today, they are trading lower than that level.
TCS and HCL Tech have however made shareholders rich and delivered multibagger returns in this period.
Tech Mahindra has evolved into a giant led by several strategic M&As and even got included into the Nifty index and delivered annual profits of over 3000cr for FY16.
However, the gap is stark. The 5th largest Indian IT company is just about 1/8th of the largest when compared on basis of annual profits. The 6th largest is 1/3rd of the 5th largest in profit terms. So from first place, to 6th place, we see a whooping 95% fall n profits. Despite all the hype around this industry for years, the second rung companies have failed to evolved into big players. Despite all the hype , hardly anyone is making even 5% of what profits TCS is making. There are so many listed tech stocks, some of these companies have been around for more than a decade still most of them have failed to evolve into players of a significant size. We keep hearing these folks talk of fancy stuff like- digital, cloud, Internet of Things, etc. but hardly any of the tech companies have had any major success yet in these new fields. All the fancy jargon just doesn’t transform into revenues and profits in the end and we keep hearing excuses ranging from weak demand, harsh winters, currency fluctuation and what not.
It is ok if the big companies take time to evolve as they lose massive revenue because of automation as the newer verticals take time to scale up to levels that will compensate for disruptions in the older businesses. But how can companies 10-15 times smaller also make same excuses? Because of such a situation, i fear that it is not as much as bad economy or changing business dynamics but sheer incompetence from the mid-cap IT companies. I don’t believe most of the mid cap IT stocks are worth investing and stocks are unlikely to give market beating returns. Because of all this, we are in a baffling situation where the big companies are still managing to grow at a modest 10-15% while several smaller ones are struggling & even seeing a de-growth in profits on YoY basis. The prospects of the industry look definitely bleak when only top 3-4 companies are growing at low teens in percentage terms and the rest are in a great mess.
When i started investing in stocks the first stock i bought in Jan 2014 was the great TCS around 2200. That too after the stock had almost doubled in the previous year and still managed to sell it for about a 20% gain a few months later.
About 3 yrs ago i bought TCS at almost 30X P/E and still managed to sell it for a decent gain in a few months.Not sure of that at 18X today.
— Sumit Sethi (@Sethinomics) September 14, 2016
Those were the last of the golden days for the IT industry, when it was impossible to imagine a portfolio at that time which would not include the almighty TCS which being the largest listed company in the country, used to still deliver over 20% earnings growth while the rest of the economy was struggling.
Compare those days to the present times, when most analysts call results good even if companies deliver 2%-3% QoQ profit growth. A stock delivering 3% QoQ earnings growth will take 24 quarters or six yrs to double its EPS. And most IT companies currently don’t inspire enough confidence to achieve even this. How things have gone wrong in past 2 yrs for this sector, as once upon a time, most of the front-line IT stocks would easily double in 2-3 yrs no matter at what price one bought them.
Currently i hold a few ‘promising’ mid-caps in this sector, whose management makes tall promises but follow them quickly with profit warnings in a few days. My allocation to this sector is now less than 10% of our total portfolio. Two yrs ago, when the industry was still growing strong, i had invested more than twice as much as now in IT stocks. I gradually sold most of them last year as companies failed to deliver on their promises of growth. I am not expecting any major recovery in the near term from them. But i am comfortable with the holding the few tech stocks i have in small quantities as the stocks have limited downside risks from here as valuations are cheap and they give frequent dividends too.Maybe i’ll add to these promising holdings with time if they eventually start living up to the guidance and growth targets their management gives. Even if the business grows at 10%, most of the IT stocks will eventually find an equilibrium price (some may have already had) and won’t fall much as there is always some value in a debt free business giving good dividends even if it is not growing. However i believe it is unlikely that stocks from this sector will convert your thousands into millions anymore like they did for the previous generation of investors. The downside may be limited from here but there may not be any significant upside in these stocks.What purpose does it serve to bet big on a stock or sector that has been under-performing for last two years and is showing no sign of turning around when so there are so many high growth stocks that are are hitting life time highs almost everyday?
Disclaimer- Views personal. Do not constitute investment advice.