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Defying fundamentals - Views on News from Equitymaster
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  • Aug 19, 2003

    Defying fundamentals

    Akin to the times witnessed during the tech boom in late 1999 and early 2000, yesterday was a day, which will be remembered for a long time to come. And this time around, one can for sure call it the steel boom. However, it was not only the steel stocks, which defied all odds and fundamentals and went through the roof to hit higher grounds, but also the so called penny stocks that are unfortunately traded on the indices and many a times have been the primary culprits of eroding investor wealth and confidence in the stock markets.

    Before proceeding further, let us keep in mind a couple of facts as regards yesterdays trade on the BSE. Beginning with the stock advances to decline ratio, it was a strong 3:1 indicating the bullish sentiments on the bourses. Also, below is given the gainers pie chart showing the percentage of various stocks gaining ground.

    As can be seen in the pie chart above, almost half the stocks (45%) traded on the BSE gained more than 8% yesterday. However, rather than the gains witnessed in these stocks, it is the quality of the stocks that have gained, which is a cause for concern. To put things in perspective, a few stocks, which remained locked on the 20% circuit, included Mardia Chemicals, Siddharta TB, Fortis Finance, Metalman Industries, Arcee Industries, Kilburn Engineering, Lloyd Electrics, Compact Disc, Ambitious PL, Bhor Industries, and the list goes on...and on...and on! How many of these have you heard about?

    Actually, the above is not a very rosy picture. On the whole, the advances to decline ratio is 3:1, however, if we consider the BSE 'A' group or the BSE-30, the ratio was a lower 2:1. This shows the skewed picture created due to the gains registered by these penny stocks. There are stocks, which investors refrained from even considering at lower levels as a buy, and now the run up in those very stocks are attracting investors, primarily retail, who are entering at the high unjustifiable and unsustainable valuations.

    A simple example could be SAIL, which nobody thought about at Rs 5 levels just a year ago. However, now the stock is attracting buying even at Rs 50 levels. SAIL gained over 30% yesterday alone. The stock has put all fundamentals to rest and has taken its own course. This is precisely what the concern is, as when such stocks take a U-turn, investors are left in the lurch with stocks, which are unlikely to see those prices again.

    Retail investors get into these stocks seemingly due to two reasons. Firstly, the large-cap stocks having already run up on the bourses owing to buying by financial institutions and foreign investors into these stocks, makes these stocks out of reach of the small investors. Secondly, the smaller stocks being easy to buy (irrespective of the fundamentals) due to the single-digit or early double-digit pricing, attracts investors (including speculators) to play in these stocks for a quick buck. But, when the tide turns, speculators are more or less able to exit the stocks leaving the retail investors' fingers burnt.

    So, what should investors do who have missed the rally? Below are just a few points to be kept in mind:

    • Decide upon the time horizon for which the equity investments are to be made. However, remember, short-term investments is not investments in the true sense, but is more of speculation. Take a longer time horizon and wait for the companies to deliver.

    • In order to be sure that the companies will deliver results, invest in companies with sound fundamentals and strong business model. Another very important aspect while investing in a company's stock would be to consider the credibility and the track record of the company's management because it is ultimately the people at the top who are responsible to make the company perform.

    • It is not that there is a lack of fundamental stories existing amongst lower priced stocks. However, what an investor needs is a thorough understanding of the company, the business and industry it is into and how can the company capitalize on the upturn and at the same time tide over the downturn.

    • Last but not the least, do not panic during stock market downturns, do not let greed overtake fundamentals during stock market booms and avoid the herd mentality (as it is a very high risk gamble). Remember, equities have outperformed all asset classes over the long term! Keep the faith!



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