The Indian stock market has always rewarded high-growth stocks, that is, all those exciting stocks that offer splendid growth in revenues and profits. The market was led by IT, FMCG and pharma stocks in the late 1990s, back when these sectors grew faster than others. The bull run of 2003-2007 was, on the other hand, dominated by a broad spectrum of stocks in infrastructure, capital goods, IT, banks and, again, pharma. Naturally, the sectors with the highest growth rates were rewarded with the highest CAGR returns.
Now, even if we take a longer time horizon of 10 years, stocks with higher growth were rewarded the most, and those with volatile earnings or low earnings growth were punished by the market. A classic example is Hindustan Unilever, which was a market favourite in the 1990s. Revenue and profit growth flattened in the decade that followed and HUL went on to earn the epithet of ‘one of the worst performing FMCG stocks’ not only in India but globally. It was only after growth returned that HUL’s stock rose from that nadir to new highs. The lesson remains the same: our markets reward growth stocks.
Seasoned investment professionals will advocate buying high-growth, good quality businesses run by efficient and professional managements with high standards of corporate governance at the right valuation. As Warren Buffett once said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Sadly, the markets rarely offer such opportunities in real life.
What’s the next best option? Go for a high-quali