Sugar Stocks: Outperformers of 2022

Mar 15, 2022

Brijesh Bhatia, Research analyst

Sugar stocks have been on fire recently. In a sluggish market, these stocks are at all-time highs.

The government's ethanol push is the big driving force here.

But should you buy these stocks now? What is the outlook for these stocks?

Find out in this video...

Hello viewers. Welcome to the Fast Profits Daily Myself, Brijesh Bhatia.

That's sugar sector has been on a stellar rally after the government announced the subsidies, or the perks for sugar companies to produce ethanol and these stocks have been on a stellar momentum.

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Even though the markets have been correcting right from 18,600 back to lower than 16,000 levels, most of the sugar stocks are trading at all-time highs. And most importantly, if you look at nine out of ten stocks, they have been trading above 200 days average, which is the long term daily average.

Let's look at the screen over here. So, I have listed the top ten stocks with the marketcap of minimum Rs 2,000 crores as on 11 February closing. And if you look over here, only one stock, EID Parry, is trading below its 200 days average. If you look at the average, it was somewhere around 443-444 levels, and the stock has closed at 426. So slightly below its 200 is average.

If you look at all the stocks, nine stocks, they are trending above the two hundred days average, the long-term average, even the markets have been correcting. So it indicates that the sector is in very, very strong bullish momentum.

What are the charts of sugar stocks are indicating? Are they are outperforming against the broader markets? Before that, let's look at first, the sugar prices, the commodity prices. If you know, commodities have been on a stellar rally. Be it crude on the back of Russia-Ukraine. There's safe haven buying in gold. Metals have been on a roll for last 1-1.5 years.

If you remember, I have been a video last year indicating that the new asset class, which is the CRB Thomson Reuters Index, a commodity index, has broken out of the long-term consolidation zone, and we have seen a stellar performance from the commodities space. But again, if you look at the soft commodities as well, they are railing on the higher side. We saw lumber, CPO, soybean, and sugar.

 

If you look at the momentum over here, sugar prices after consolidation, is taking multiple supports. The support has been acting as the demand zone now.

If you look at the green parallel channel over here, the prices are now about the green parallel channel which is the short-term break out.

If you look at the black lines we've have a long-term demand zone. So prices acted as a support as a support and accumulation was seen in to the demands zone in the sugar prices. It indicates that the momentum is still very, very bullish.

If you look at the lower panel over here, the RSI on the sugar chart, it has given a bullish trend, retested the previous resistance, which is acting now as a support zone, and the curve has moved towards the north, indicating the strength is still in the bulls' court. We might eat sugar prices heading higher.

 

Ethanol. Again, if you look at the CBOT chart over, this is the ethanol price, the futures, which is traded on the Chicago Board of Trade. If you look at the break out right from the green trend line, which was last year 2021, since then, ethanol prices have been on a roller coaster momentum.

If you look at the orange line, this is a monthly chart, the orange is the 15 months average, the prices have been convincingly trending above the long-term 15 months average. The momentum is very, very strong in the ethanol prices as well.

Sugar price is trending bullish. Ethanol price is trending bullish. Well, it's a win-win situation for Indian sugar companies which is being witnessed in the stock prices which are in this stellar rally. Let's look at the stock index over here.

 

So we created this. Though we don't have a sugar index on the NSE or BSE, but still, we created an equal weighted sugar stock index, which which we call EWSSSI. If you look at the momentum over here, the previous high, which was in 2017-2018, has been breached now.

So if you remember 2016, 2015-second half, to 2017, the super prices witnessed a stellar rally. Since then it was underperforming by a huge margin. There were some of the fundamental issues into the Indian market. But now that level has been surpassed. 2017 has been surpassed, which we created the index, and look at the momentum. It's very, very strong in this index, which we have created.

If you look at the blue line, which is again the 200-weekly average, the price has been trending above the 200-weekly average. Again, a sign of a long term bullish momentum.

 

Even if you look at the daily, we are using a top-down approach, and if you look at the daily chart over here, it's the same. The prices are still trending on to the bullish side. The blue line, which is the 200 days average, has been not breached since the recovery of the 2020 pandemic fall.

This is a bullish sign where the Nifty has been trending below the 200 days average, the sugar index, which we have created, is trading above the 200 days average, which means that the trend is very, very strong. When the broader markets are performing and the sector is outperforming, it indicates a huge strength in the space

Look at the sector. There are no stocks which are in the largecap space. Most of these stocks are into the midcap and smallcap space and these are outperforming by a huge margin. So I believe the sugar sector is very, very bullish.

 

Let's look at the comparison with the CNX 500 which is the broader market. As I said, none of the stocks are into the largecap space and most of the stocks are in the midcap and smallcap space. We compared sugar index, which we created, with the Nifty 500, which is taking the 500 stocks of the broader market space.

If you look at it over here, we are witnessing a rounding bottom structure formation right from the 2018 to 2022. We broke out of this outperformance rally in late 2021 probably in November, December and since then, the outperformance has increased by a huge margin of the super space against the CNX 500.

So a fresh breakout momentum has been witnessed into the outperformance of sugar stocks against the Nifty 500. And this is just the start, I believe for the sugar space outperformance.

If you look at the four years of consolidation zone in the form of a rounding bottom structure and a breakout, it is not a small time-frame of four years. It's not four days or four weeks. But it's four years, and I believe this rally might see a huge upside for the sugar space.

Any dip, it's a good accumulation level and I think that this can be the bast sector of 2022 and probably the rally might continue in 2023 as well.

So stay invested in the sugar space. Use dips when you see the stocks are hugely outperforming against the broader market and stay invested in the sugar space.

Signing off, Brijesh Bhatia.

Warm regards,

Brijesh Bhatia
Brijesh Bhatia
Research Analyst, Fast Profit Report
Equitymaster Agora Research Private Limited (Research Analyst)

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