The BSE Sensex surged to a new high of 36,699.53 points, but the broader market is still far from exhibiting any strength as domestic investors are clearly showing their preference for large-cap growth companies only. Stocks in the mid- and small-cap space are struggling to stabilize.
A large majority of companies have seen a bloodbath since the beginning of this year. One in four stocks in the BSE 500 gave negative returns since January. To be precise, 375 companies in the BSE 500 index have gone nowhere. If you have been holding four stocks, chances are three of them would have been in red.
CONCENTRATED GAINS
Additionally, over 300 companies in the BSE 500 index lost more than 10 percent since January, while 205 companies lost more than 20 percent.
On the gaining side, only 40 companies in 500 delivered returns of over 20 percent since January, which clearly shows that the markets have become extremely selective in the six months.
Among the top gainers this year have been Indiabulls Ventures, which increased 80 percent to Rs 479.60, while First Source Solutions 79 percent to Rs 73.20. Among others, NIIT Technologies gained 74 percent (Rs 1126.55), Mindtree 71% (Rs 1046.95) and HEG 67.5% (Rs 3908.45).
It is important to remember that most portfolios have a large number of companies still in the red. Stocks like Vakrangee -86.91% (Rs 55.10), Kwality -84.07% (Rs 18) and Reliance Naval Engineering -73.73% (Rs 12.91), PC Jeweller -71.75% (Rs 129), and HCC -70.72 (Rs 11.99) were some of the biggest losers since January.
You could see the markets continuing to favour the growth and quality companies over the next few months. Mid- and small-cap companies could continue to reel under pressure and their upcoming results will be closely watched.
You will see investors looking increasingly for signs of sustainable growth in the upcoming results. Of course, valuations is another factor that will be watched. Mid- and Small-caps are not trading anywhere cheap with PEs quoting over 60 times.
Large caps, on the other hand, are expected to record its best ever earnings quarter in the last four years as profits are expected to rise over 25 percent in the coming years.
THE MOVING SECTORS
IT sector is also showing signs of a turnaround as the rupee depreciation is expected to drive profits higher. A large number of IT stocks like L&T Infotech 60% (Rs 1791), Mphasis 57% (Rs 1148), Take Solutions 49% (Rs 239.70), Tata Elxsi 47.89% (Rs 1444), and TCS 46.62 (Rs 1979.60) have been in the favoured books of savvy investors.
Stock investors would be wise to prepare themselves to see a different market in the next few months. Markets are clearly willing to give a high price for visible growth. New investors will find it difficult to justify such prices.
YOUR NEXT MOVES
When looking for investments, find a strategy that fits with your risk profile. You must choose to ignore the market’s behavior and for the most part focus only on a company’s earnings potential.
You have to locate some undervalued stocks. This may be tricky since the entire market appears to be skewed in favour of growth and valuation. A big indicator to see: a solid company which shows promise and with a low price.
A big lesson in this market: don’t chase all and sundry market tips.
Do have quality large caps in your portfolio.
What determines quality in this market? A good management that understands the concept of returns on equity and in sectors that have vast opportunities to expand and scale up.
