The Straits Times Index’s Best Shares for the Year

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Large cap shares are passé. Small caps are the way to huge returns!” 

Does the above refrain sound familiar? For those who believe in that statement, you might be in for a surprise. Even though the Straits Times Index (SGX: ^STI) only returned about 6.5% since the start of the year, a number of its 30 components (all 30 shares are large cap blue chips) have generated returns higher than 30% in the same period.

In fact, for the period spanning 1 January 2014 to 31 July 2014, the index’s best performer had jumped a stunning 61%. Here are the top two performers.

1. Olam International Ltd (SGX: O32)

Back in late 2012, the short seller Muddy Waters started criticising Olam’s business model. That caused Olam’s share price to drop from S$2.00 in mid-October 2012 to a low of around S$1.40 by that December.

Yet, the commodities trader is now defying gravity and is the Straits Times Index’s best performer in the first seven months of 2014, rising from S$1.535 to S$2.47. Why is this so? That’s because Olam’s major shareholders, including Singapore’s very own sovereign wealth fund Temasek Holdings, has time and again expressed their confidence in the company.

Just a few months ago in May, a consortium of investors led by Temasek Holdings had acquired four-fifths of the company’s shares at S$2.23 each. After the purchase was completed, Olam’s shares continued to rally as the market seemed to regain confidence in the company.

However, there’s still plenty for Olam to do in terms of its business fundamentals. The company still carries a lot of debt (its net debt to equity ratio stood at 2 based on its latest financials) and its operating profit is still showing year-on-year declines.

Unless the company can conclusively prove that it has turned its business around, it might be tough for the company’s shares to show such great returns every year (in fact, a 60% return every year would be an extremely tough accomplishment even for a company that’s growing like gangbusters).

2. Noble Group Limited (SGX: N21)

Next on the list is Noble, which has returned 33% from 1 January 2014 to 31 July. The high volume, low margin business of managing commodity supply chains which Noble is involved with might not be intuitively linked with a great business. But, the company’s shares have actually turned in a stunning 14% compounded annualised total return for its shareholders since 2000.

But in a similar way to Olam, Noble Group’s high leverage might scare off most investors; the latter has a net debt to equity ratio of 0.9. Interestingly, Noble has never suffered operational losses in the past 10 years despite having inherently razor-thin profit margins.

Foolish Summary

It is fascinating to note that the best performing shares are not fast-growing or well-loved companies. Instead, they are companies which investors tend to underestimate after running into some business difficulties. So, what are some companies facing troubles now? If you think the market’s underestimating their potential for recovery, you might have just spotted your next big winner.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn't own any shares of companies mention above.