»5 Minute Wrap Up by Equitymaster

On This Day - 9 AUGUST 2018
The Virat Kohli Effect in the Sensex is Throwing Up Buying Opportunities Now

Girish Shetty, Research analyst, The 5 Minute Wrapup

Watching India's recent test match, I felt a sense of déjà vu.

It was the 90's all over again. Then there was Sachin Tendulkar who was the lone man fighting. Today it is Virat Kohli.

In the recently concluded test match, while Virat Kohli scored 200 runs, the other 10 players managed a total of 214.

If he was looking for support, there wasn't any. Despite his heroics, India lost the match.

The stock market these days is going the same way. Sensex is at an all-time high.

But something seems amiss. There is no euphoria celebrating these historic highs.

The Sensex is up but no one seems happy.

You dear reader might also be having the same question as everyone - 'Why aren't my stocks performing even when the market is high?'

I assure you, you are not the only one who's confused.

A closer look at the index and you'll see the Virat Kohli effect. There are 10-12 stocks which have outperformed the rest comfortably.

Returns from the Top 12 Sensex Stocks - 2018

Name Share Price - 1st Jan 2018 Share Price - 8th Aug 2018 YTD Return
TCS 1,327.33 1,968.1 48%
Infosys 1,034.55 1,369.4 32%
Reliance 911.55 1,183.55 30%
HUL 1,347.25 1,730.4 28%
Kotak Bank 1,001.65 1,283.5 28%
M&M 745.5 926.3 24%
Asian Paints 1,146.5 1,419.6 24%
IndusInd 1,626.25 1,995.2 23%
Yes Bank 313.2 381.3 22%
HDFC 1,687.35 1,972 17%
HDFC Bank 1,857 2,132.15 15%
ITC 262.95 301.2 15%

Since the start of the year, the top 12 performing stocks of the Sensex have given a return of 25%. The rest have declined by 12% on an average.

The mid and small cap indices are down by 9% and 14% respectively since the start of the year.

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With the constant flow of money coming in, mutual funds have also taken the safer option and resorted to large caps. As a result, a part of the Index is constantly on the way up.

Even among these 12 stocks, there is a heavy concentration among a few sectors. Most of these stocks belong to the Banking, IT and consumer facing sectors.

Imagine if the banking sector faces a roadblock? What happens if Trump's protectionist policies affect IT companies? Where would fund managers go then in that case?

It is foolhardy to expect these 12 companies to do well forever. But with the bubble slowly but surely building up, if they don't meet the market's expectations, the fall might be hard and fast.

What should you do in such a situation?

You might be tempted to follow the herd into these top 10-12 Sensex stocks.

But this where the small retail investor loses out. Fear of Missing Out (FOMO) is too real. Valuations go for a toss. We start looking for opportunities to make up money quickly.

Unfortunately, more money is lost when we try to recover lost ground.

You might enter a stock at the peak and face the brunt of the market correction that follows.

I wrote to you about doing nothing in the markets.

  • The difficulty in staying put - and constantly feeling the need to do something - is a commonly-felt human experience.

    We are conditioned to be busy, look busy.

    People associate doing nothing with being lazy.

    It is wired in our behavior to be doing something all the time.

    We encounter this in the investing world as well.

    When there is a correction, we feel the need to constantly monitor and do something with our portfolio - and end up making irrational decisions.

    That's why we see people tuned into financial news channels 24/7 - waiting for updates on the stocks they hold; watching the tickers and charts and talking heads like they're lives depend on it.

    Often, we tend to do the exact opposite of what we need to do.

    Try going to someone for advice on a stock - just to see what happens. If the person says, 'Do nothing' almost every time, he might just be the right person to guide you. On the other hand, someone who is giving you the latest 'hot stock pick' every day of the week is just the guy to avoid.

'Doing nothing' is one of the important things to 'do' sometimes.

Sit back and evaluate your investment process. Make a note of what you've done right and where you've gone wrong.

I can tell you what we're doing. The recent correction has given us time to focus on top quality stocks without worrying about missing out.

Attending Annual General Meetings (AGMs) of various companies, evaluating their business prospects and waiting for the right time for valuations to turn in our favor.

We believe there will be opportunities to enter quality companies soon. And we will be ready to act on them.

Chart of the Day

The Indian stock market has had a hard time of it in 2018.

But a look at the Sensex would suggest just the opposite. The BSE Sensex is up by 11.4% in the current year.

The real picture can't be further from the truth. Only 12 stocks are responsible for Sensex touching their lifetime highs. TCS, Infosys, Reliance along with few other stocks have led to this outperformance.

The top 12 stocks have returned 25.5% on an average while the other 19 stocks in the Index have declined by 12% on an average.

Sensex Return Skewed by Top 12 Stocks

Corporate governance issues at mid and small cap companies have led to their corrections from sky high valuations a year ago.

Even among Sensex stocks, Tata Motors, Vedanta, and Bharti Airtel have performed poorly due to structural issues in their businesses.

What happens when the top 12 fail to meet the market's expectations?

There is a strong possibility they might take down the other 19 stocks and the index further with them. In such a situation, despite the recent correction, mid and small caps won't be safe either.


Girish Shetty
Girish Shetty
Research Analyst, ValuePro

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