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Be aware! - Views on News from Equitymaster
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  • Dec 10, 2003

    Be aware!

    The current rally in the stock markets seems to have fueled the imagination of a host of market participants including the likes of speculators as well as traders. True, that the current stock market rally is more secular in nature than the last one, however the movement of certain sectors makes one wonder whether like the last time are we headed for a stock market bubble of over ambitious expectations?

    Is the rise warranted?
    BSE-SENSEX 5,226.4 1.80% 5,263 / 2,904
    S&P CNX NFTY 1,675.3 1.80% 1,688 / 920
    DSQ SOFTWARE 11.1 20.00% 22 / 5
    SONATA SOFTWARE 17.01 20.00% 20 / 11
    TRIGYN TECHNOLOGIES 22 19.90% 32 / 10
    SILVERLINE TECH 6.94 19.90% 32 / 4
    HEXAWARE TECH 385.2 18.80% 354 / 90
    GTL LIMITED 83.05 16.60% 100 / 49
    KALE CONSULTANTS 58.3 14.20% 58 / 23
    ROLTA INDIA 107.6 14.00% 103 / 50
    RAMCO SYSTEMS 344 10.60% 615 / 225
    PENTASOFT TECH. 3.74 10.00% 14 / 2
    PSI DATA SYS 87 7.70% 105 / 40
    POLARIS SOFTWARE 204.5 6.80% 201 / 95

    The case in point is the abnormally significant appreciation in the stock prices of second-rung software stocks. The table above indicates the gains these second rung software stocks have made yesterday, i.e., in a single day. For one, the movement of these, that too in a single day looks more speculative in nature. This notion seems logical especially considering that some of the companies mentioned above have a dubious record in the stock markets. The question that comes to mind is that what has changed suddenly to warrant such movement in these stocks? The fundamentals for the sector and we can safely say for these stocks does not seem to have changed much.

    The large sized orders that investors are expecting are few and far in between. And even if large orders do come around they are more likely to go to larger and more established companies in the sector. Smaller companies are not likely to feel the benefits of the same until later. While the pressure on billing rates have abated for most of the companies in the sector it is still too early to say whether we are completely out of the slowdown in the sector. Also the topline growth is limited mainly to the larger players. Under these circumstances one needs to carefully look at the valuations of the second rung software stocks, especially since they are not relatively as researched as the larger companies.

    In a bull market investors can easily get carried away. Speculators are the main reason for the same. Investors need to guard themselves against these kind of speculative movements in the stock markets. The need of the day is to carefully assess the risk return profile of any investment and, specifically, at this point of time to limit ones expectations from the stock markets. Research or entities that can provide you with unbiased research are the order of the day.



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