Why many stocks do not perform in a bull run

About two decades ago, I read this joke where an old man seeing off the other on a long distance train about to chug along expressed his parting wish of staying back a little longer. The man sitting inside the train emotionally yells back, "you could have told me last week when I went to reserve my train ticket or you could have told me last night while I was packing my baggage or at least today 30 minutes before I left your house to fetch a cab! Now the signal is green, the guard is waving the flag and you tell I should have stayed back for another week"! Such is the journey of stock markets.

India has seen the peak of bull runs twice in the recent period – one in January 2008 when the Sensex was around 21,200 and the second in January 2015, when it was close to 30,000. Like the previous bull runs, this time too many mid cap stocks have gone up several folds from September 2013 bottom. The retail investors have marketed many stocks, which have moved up substantially as "they still look very attractive". The truth is that there is a dichotomy between the broad equity indices and individual stocks. The broad indices, though highly volatile, are normally quite linear in the very long term. Of course, the exception has been Japan's Nikkei Index – it rose to 38,916 in December 1989.

Even after 25 years, it is still quotes at 18,032 today, which is less than half its historic peak! Even after next 25 years, it is not clear whether this previous record would be broken as Japan is going through a tough time due to poor economic growth and adverse demographic profile. Unless any economy faces such major structural problems, the broad market indices do recover in the long run. However, this is not absolutely true for the individual stocks even in a rising economy.

In 2009, the Sensex fell 60% to 8,200 from 21,200 – the peak of earlier bull run – within 13 months. However, in the subsequent six years, the same index has recovered all losses and also moved up 38% from the previous record high. Every bull run witnesses few themes being played out and temporarily the PEs (price-earning ratios) of many stocks peak out majorly because of perceptions rather than fundamentals. Post these thematic bull runs, such bubbles in the PEs are not sustained. When the next bull run commences, it normally chases new themes and hence, the stock prices of many individual stocks, which were part of earlier bull run crack in a big way.

From the peak of last bull run in January 2008, the Sensex has moved up 37% as of now – however, about 20% of BSE500 stocks are still in the negative territory. Ninety-one out of 421 comparable stocks (excluding the new entrants after the last bull run) in BSE 500 have lost money for the investors. In fact, the average loss in these stocks has been whopping 50% even after 7 years! The time is ripe for the retail investors to verify whether the individual stocks just "look" attractive or are really appealing in terms of valuation parameters!

The author is the founder and MD of Equinomics Research & Advisory (P) Ltd
EOM