Stocks in our markets seem to move by rotation. Sharp traders who spot the trends early, make money. When a wave of money moves in to or out of any sector, there can be a whiplash on the ‘investors’ who board the train late. Till a year ago, pharmaceutical companies were prized investments and were quoting at crazy levels. Then the skeletons started to tumble out and the prices crashed. So someone might think that there is an overreaction and buy the fall. However, this may not work out well. For one, the industry woes do not seem to be over. And secondly, how are these companies going to regain the markets and pricing power that has been lost? It is going to be a long haul. And one could wait for a very long time before the sector finds favour again. One important thing that people could overlook is valuations. Even after the fall in prices, the valuation has merely come down from exorbitant to expensive. There is still no margin of safety. Thus, by buying now, you may be able to make some smart trading gains if your timing is right, but it is unlikely that you will make supernormal returns in quick time.
Similarly, look at stocks in metals. Many of the fallen stocks are now finding favour and there is a run up in prices. Whether it is Tata Steel or Vedanta, the prices have rallied sharply. Maybe there is some more steam left in the sector as the benefit of rising metal prices start reflecting on the bottom lines. However, we always run the risk that the juice in these stocks have already been extracted by the first movers and after the sharp moves on think volumes, prices can get sluggish. Unless there is concentrated buying, prices will not go up. And at every rise, some early entrant will be offering fresh supply as he pockets his gains. I am not an expert on commodity prices, but have seen this cycle play itself often. The stock prices peak much before the underlying commodity price. When everyone starts to notice and talk about the sector, the time to look at other things is around.
Microfinance and housing finance are two other sectors that are in favour. Valuations are very aggressive and prices are now hyper-sensitive to bad news. Yes, there is a big shift that has happened when growth moved from PSU banks to private banks and private players. However, this will taper off and growth will slow down to reasonable levels. With so much money flowing in to the markets, it is difficult to spot undervalued stocks. Thus, there is a rush towards the ‘out of favour’ sectors. If you are lucky enough to catch the trend early, you make some quick money. The later you get in, the worse your chances. Smart mo-ney moves in to these sectors long before research reports get published. They make the big money on these cyclical moves and the investors who follow the noise can end up even losing money.
Most of these stocks that are ‘out of favour’ will have one common characteristic. Poor RoCE, lumpy and jerky profit numbers and high leverage. They are unlikely to fit in to a long term investment list and should be seen as trading opportunities, if one is so inclined. Discipline in trading will certainly help. Don’t get carried away and place disproportionate bets. This market does not off-er much comfort in terms of valuation. However, given the strong funds flow and the fair economic conditions, the poor earnings are not impacting investment sentiment. While we see the broad indices of the stock market stuck in a zone, the mid cap space is see-ing a lot of churn. Mid cap indices which had fallen sharply have pulled back as sharply. The valuation matrices are still not tempting, but there are many investors who probably have the ‘left out’ feeling. Know the risks at this level. If you are in diversified mutual funds, there is less to fear. And if you are in SIP mode, do not bother. hese are interesting times. Globally, the world is on an edge, politically and economically. Growth numbers are getting smaller. However, there is surfeit of money. Personally, I am happy to keep away from the stocks. I do not have a ‘compulsion’ to invest.
(The writer is a veteran financial advisor. He can be reached at email@example.com)...