Gujarat elections critical for Street

Not all buzzing stocks destroy the wealth of investors, but most stocks which destroyed a lot of equity wealth of the investors in the past, were buzzing stocks at the peak of the Bull run in their stock prices. Since the beginning of the calendar year 2017, Sensex has gone up 23%. However, the market cap of all listed BSE stocks has gone up 35% from about Rs 107 lakh crore in the first week of January 2017 to around Rs 144.50 lakh crore yesterday.

Despite such massive rally, it would be surprising to know that, as of yesterday, over 225 stocks lost anywhere from 30% to as high as 95% of market caps since the first week of January 2017. Many stocks which lost 70% to 95% of their market caps were “buzzing stocks” (which are defined as stocks with huge market focus and tremendous spurt in volume of trading). This time more caution is needed from the retail investors to protect their equity wealth. In the past, normally when the overall market falls very badly, many buzzing stocks crash and lead to permanent loss of capital. This is what happened, for example, post dot com burst in 2000 and again post Lehman crisis in 2008.

But this time when the overall Bull run is still intact, we see a lot of stocks losing huge proportion of their market caps. Since March 2015, the Sensex has moved up just 10%, however, the market cap of all BSE-listed stocks moved up 40% from Rs 103 lakh crore to Rs 144.50 lakh crore now. This massive ramp up in the overall market cap was predominantly led by small and midcap stocks. This in turn was largely on account of robust inflows from the retail investors, who could have brought in roughly over Rs 4 lakh crore into the markets since March 2015.

Now, the breadth of the market in terms of total value for the small-cap and mid-cap space itself is an issue – it is quite difficult to find enough liquidity to keep pumping in to support all buzzing stocks in this space. Hence, tactically smart money seems to be jumping from one set of buzzing stocks at the peak of their valuation to another set of mid cap stocks, which are “on the way to emerge as buzzing stocks”. Perhaps, this is the reason for many small and mid cap stocks falling too steep while overall bull run is still intact.

Now not only the breadth of the overall market, even other developments warrant caution on the part of retail investors. Crude oil price has already moved up more than 100% from last year bottom and now the major oil producers have extended the oil cut schedule to end of 2018. Ever since the present ruling party came to power, the market cap of overall market moved up more than 74%, thanks to initiatives on economic reform measures. Therefore, the mandate from the forthcoming Gujarat elections remains critical for the continuation of the current Bull run. Nearly 1,100 stocks (a majority of them small and mid cap stocks) are trading at a trailing PE of over 40 at present. Thus, smart money is certain to move out of many overvalued “buzzing stocks” and swapping them for safer stocks. Do not stay long in buzzing stocks unless valuation is appealing, and the quality of management and balance-sheet are also comfortable.

The writer is founder and managing director, Equinomics Research & Advisory