The Return of Bluechips in 2024

The Indian stock market has delivered an excellent performance this year. The benchmark index, NSE Nifty, is up about 20% in 2023.

However, the stars of the year were not large-caps stocks. In reality, baring a few exceptions, index heavyweights underperformed the broader market.

The big winners this year were stocks from all other market capitalisations. People have made more money in midcaps and smallcaps in 2023 than in index stocks.

The numbers don't lie. This year the BSE Midcap index is up 43% and the BSE Smallcap index is up 45%.

Microcaps and penny stocks don't have indices but it's safe to say that many stocks in these categories, perhaps most of the stocks, have delivered solid, index beating returns to investors.

It's common to hear investors talking about some penny stock or the other doubling their investment in a few months.

Even if we ignore penny stocks and focus our attention on the most popular stock category off 2023 - smallcaps - we will see signs of wealth creation everywhere.

One out of every four stocks, among the 950-odd stocks in BSE Smallcap index, have turned into multibagger stocks.

But can this euphoria continue?

As per Richa Agarwal, Equitymaster's smallcap guru, to answer this question, we must look at the Smallcap to Sensex ratio.

If we check the Smallcap to Sensex ratio, we see that it's about 0.59. This is above the long-term average. A Smallcap to Sensex ratio above 0.6 is a sign of serious overvaluation in the broader market.

In fact, if this ratio gets close to 0.7, it would be a sign that the market is in danger of a big crash.

Thus, we can say that smallcaps are overvalued compared to largecaps at the moment.

Now does that mean largecaps are looking like attractive investments these days?

Well, it's incorrect to paint all largecaps with the same brush. Besides, the current Nifty PE ratio of 23.1 certainly does not suggest that largecaps are cheap.

There are some largecaps that are less expensive than others but largecaps as a general category, or the Nifty index for that matter, are close to becoming overvalued...just as smallcaps in the market.

But what about relative performance in 2024? If smallcaps have outperformed largecaps this year, can the opposite happen next year.

Yes, it can. In fact, we believe it's likely. No matter what happens to the stock market in 2024, we think the odds are in favour of the Nifty/Sensex outperforming the midcap and smallcap indices.

Now by 'outperformance', we mean the benchmark index should deliver a higher return than the broader market indices. Nothing more. We are not predicting gains for the Nifty if midcaps and smallcaps deliver negative returns.

If the entire market were to fall next year, the Nifty would fall too. It's just that it would fall less than the midcap or smallcap indices.

There have also been cases in the past when the Nifty has held its value in a year in which midcaps and largecaps have suffered. 2013 and 2018 come to mind.

And if the entire market were to continue its rise next year, then largecaps still have a good chance of outperforming the broader market based on valuation upside alone.

Only time will tell. But investors should be ready for any eventuality. In the stock market, it's better to prepare than predict.

So, let's look at a simple but effective 3-point checklist to identify the best bluechips in the market.

#1 Debt

It's always a good idea to start with debt levels of the company you are considering.

Ideally bluechips should have very little debt or should be debt free. Many fundamentally strong stocks are also zero debt stocks.

You can check out the list of debt free companies.

Also, it's a good idea to look for bluechips that are actively reducing their debt. While they may have some debt today, they are unlikely to be badly affected by high interest rates or a slowdown in sales growth, as the lower debt will support profits.

Here's a list of the top companies reducing debt.

#2 Dividends

Next, you should check the dividend payout.

Bluechips are among the most fundamentally strong companies. They have rock solid cash flows. They often share this cash with investors as dividends. Bluechips usually have a long track record of dividend payments.

In a stock market downturn, dividend paying stocks are in high demand as investors prefer the safety of the cash flow that dividends provide over capital gains.

These stocks can also provide good dividend yields during a market crash. This is because they tend to fall initially along with the rest of the market. But as soon as their yields become attractive enough, investors jump in and buy them.

This means high dividend paying stocks have an in-built stop loss. Check out the companies with the highest dividend payouts and the highest dividend yield stocks.

There are also excellent companies that raise their dividends every year. In these stocks you get the benefit of capital appreciation as well as rising dividends. They are called dividend growth stocks.

Check out the list of dividend growth stocks.

#3 Growth

Companies that maintain good sales and profit growth are always in demand. In the case of bluechips, you should be extras strict about growth in topline and bottomline. The higher the better.

The market knows these stocks are essentially getting cheaper every year. This is because high growth increases per share earnings at a fast pace. This combined with a falling market makes these stocks attractively valued. At a certain point, deep-pocketed invests start buying these stocks.

But if you are patient, the stock market will present you with a golden opportunity to buy these stocks at a great price.

Check out the list of fastest growing companies as well as the top growth stocks in the market.

Conclusion

Bluechips act as a defensive strategy during market downturns, as they exhibit more stability compared to midcaps and smallcaps stocks.

However, they are not immune to market fluctuations. They can still experience declines in value during severe market downturns or company-specific challenges.

Do your due diligence before considering any stock for investment in 2024, even bluechips.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...