Bonanzas and blowups: the best and worst of 2018

The 2018 year started so well. The first three quarters of the year saw the S&P/ASX 300 Index put on 7.7 per cent. But the final quarter saw the same index, inclusive of dividends, record a 10 per cent decline. In the final washup the index recorded a negative return of 3.0 per cent for 2018, with more than half of the stocks falling by 7.1 per cent or more.

For long term investors like us, it's good news. Like groceries, we want to buy stocks when they're on sale - so further declines would be welcome.

But the index return hides the performance of stocks at the extremes: the biggest winners and losers, which is what we're interested in. Here we created a list of the year's best and worst performers to see if there were any surprises.

We've chosen to look at the S&P/ASX 300 because it's probably most representative of the pool of stocks large and liquid enough to recommend to members. We ranked the stocks according to total return, which includes dividends. We've also added back stocks that were removed during the year to adjust for survivorship bias, as the poorest performers are periodically removed from the index.

The IT crowd

Of the best 50 performers, information technology (IT) was the stand-out sector, representing 16 per cent of the top 50 despite making up just 7 per cent of ASX 300 constituents. Energy-related companies also fared well, making up 8 per cent of the top 50, while representing 5 per cent of the index. Within the 50 worst performers, materials represented 36 per cent of the group against a 19 per cent share of the index [Ed: sorry about that, Gaurav]. Surprisingly, IT stocks also appeared disproportionately in the weakest category, representing 12 per cent of the bottom 50. It suggests IT-related businesses had more extreme outcomes.

It was also noteworthy that the bottom twenty were in the doghouse for a hotchpotch of reasons: excessive leverage, technological redundancy, fraud and poor acquisitions. Each underperformer had its own unique story.

In contrast, the majority of the top twenty were there for the same reason: solid growth and performance. Although a few favourite themes emerged, with scalable, growing software companies clearly flavour of the year.

With that in mind, we've decided to focus on the losers - because the stories there help us understand what to avoid in future. Let the countdown begin.

Poorest performers

#5 BWX (ASX:BWX), Total return: -78.8%

Cause of fall: Poor acquisitions, high growth priced in

BWX is a developer, manufacturer and distributor of natural beauty products that owns a number of brands such as Sukin and Mineral Fusion. Using a roll-up strategy, the company bought many of its brands during an aggressive acquisition binge at high prices. The acquisitions masked poor organic growth and, with revenue growing at a rapid clip, the market began to price in lofty growth expectations. Investors were to be heavily disappointed when the company revealed poor performance and a decline in first half profit of 31 per cent. The withdrawal of a proposed takeover was a big red flag for BWX.

#4 Isentia (ASX:ISD), Total return: -79.6%

Cause of fall: Technological redundancy, poor acquisition

Isentia was Australia's leading media monitoring company, holding a 90 per cent market share. The general perception was that its market position was close to impenetrable. But over time technology improvements disrupted the business model; it was no longer necessary to hire a bunch of staff to physically watch television when closed captioning and social media was just about good enough. The company responded by loading up with debt to acquire King Content - a terrible move in hindsight. Consequently the company has begun to unravel and, while we were taken in by the strong market share initially, we managed to get out before it turned disastrous.

#3 ImpediMed (ASX:IPD), Total return: -81.3%

Cause of fall: No earnings, overpriced 

ImpediMed develops medical products that use electrical current to measure tissue and fluids in the human body. Despite having revenues of just $4.8m and never having made a profit, the company's market capitalisation exceeded $350m in early 2018. It appears the market has lost patience with this pre-earnings technology company, which reinforces the lesson to invest only with a margin of safety.

#2 Retail Food Group (ASX:RFG), Total return: -87.9%

Cause of fall: Excessive leverage, unprofitable franchisees

Retail Food Group is a multi-brand retail food franchise owner, owning brands like Donut King, Crust and Gloria Jeans. Poor performance of a number of its franchisees led to equally poor performance of the company's wholesale business. This, coupled with excessive debt led to its undoing. Executive chairman Peter George has taken over the day-to-day operations at the company, and noted the company will need to reduce its cost base, sell assets and possibly recapitalise in order to survive. Another one we avoided. 

#1 Blue Sky Alternative Investments (ASX:BLA), Total return: -94.5%

Cause of fall: Dubious accounting, class actions

Blue Sky Alternative Investments comes in as the worst performing stock this year. The Australian-based private equity fund was outed by research group Glaucus for overstating the value of its investments, earning inflated performance fees in the process. After overhauling the management team, the company has conceded a number of breaches of the company's Australian Financial Services Licence, forcing it to take a $50m loan from Oaktree under onerous terms.

Speaking of Oaktree, founder Howard Marks has a saying that, 'If we avoid the losers, the winners will take care of themselves'. Hopefully looking at the above list will provide us some ideas of what to avoid in 2019.

You can download a spreadsheet of the best and worst performers in the S&P/ASX 300 for 2018 here.

Top 20 performers

Bottom 20 performers