The harder stocks fell, the higher they bounced back

If you were allowed to travel back in time to March 9 this year, when the Sensex was poised at 8100 levels, which stocks would you have bet on? Analysis shows that you would have reaped the best rewards had you been brave-hearted enough to buy those that were the most out-of-favour at that point in time. The realty sector, which was down 91 per cent from its January 2008 peak, has been the best sector performer in the post-March rally.

Small-cap stocks have been the best market cap segment to be in. And if you had built a portfolio of stocks that had seen a value erosion of 90 per cent or more in March, you would actually have got five times your money in six months! In a nutshell, ‘What fell the most must rise the most’ is a maxim that has held well in this rally. Does this experience hold any lessons for investors? Well, for starters, here’s an analysis of the stocks that led to this rally.

Sectors at the forefront
Returns on the BSE sectoral indices suggest that investors would have been able to outperform the broader market by betting on sectors that were battered the most as the market plunged to its March lows. The clear frontrunner in this rally is the realty sector which, between March 2009 and now, has delivered a staggering 230 per cent return, surpassing other sectoral indices (100-150 per cent return).

The realty sector was singled out for brutal treatment in the market fall; with the BSE Realty index losing 91 per cent in value between January 2008 and March 2009. However, few investors may actually have taken advantage of this opportunity as there was barely any sign of a recovery in the realty sector’s prospects in March. . Signs of recovery in the sector’s fundamentals are just beginning to emerge, and mainly for the larger players.

It is, however, important to note that had you invested in realty stocks at their peak, you would still be staring at sizeable erosion in your wealth. If betting on realty was a difficult call to make, putting money on metals or capital goods, the other two most beaten down sectors in March 2009, would have paid off well too, though not as handsomely as realty. While the BSE Metal Index is up 184 per cent from its March low, the BSE Capital Goods index is up 140 per cent.

The two sectors that have done well in this rally without suffering too much in the previous fall are IT and automobiles. The BSE Auto index is up 136 per cent, after taking just a 55 per cent knock in the 2008 correction.

The BSE IT index too has more than doubled from its lows, after losing 56 per cent from its peak.

Small-caps race ahead

It is not just in terms of sector preferences that down-and-out stocks led this rally. Small and mid-cap stocks that fell more than their blue-chip counterparts during the meltdown too outperformed in the rally so far. Consider this.

With a near 80 per cent fall, the BSE Small-Cap Index lagged the BSE Midcap (down 75 per cent) as well as the Sensex (down 62 per cent). In the bounce-back, the situation has simply been turned on its head. While the BSE Sensex delivered a 95 per cent gain from its low on March 9, the BSE Small-cap index returned 144 per cent and the BSE Midcap Index 129 per cent.

The out-performance of small and mid-cap stocks has been a clear outcome of their bargain valuations during the lows. The BSE Midcap index traded at a price earnings multiple of just nine times trailing earnings and the BSE Small-Cap index traded at less six times during the March 2009 lows. A reversal in the interest rate cycle, with rates beginning to trend down, may have supported the re-rating of these stocks, as has the better-than-expected sales growth of the mid-sized companies in the June quarter.

However, investors need to note that while betting on small or mid-cap stocks at market lows may pay off eventually, taking bets on them when markets peak can be extremely injurious to their wealth!

Stocks that led the rally
The above trends prove that investors who picked the most battered sectors and classes of stocks would have reaped the most rewards in the recent rally. But what about individual stocks? Well, the pattern is only repeated.

If an investor had completely ignored all fundamental or sector considerations and blindly picked up the ones which fell more than 90 per cent from their peaks on March 9 2009, his/her portfolio would today have risen by 366 per cent from its March 9 value! The investor would have clearly outperformed the Sensex, which made a 93 per cent return in this period.

The multi-baggers of this rally were the mid- and small-cap players from the realty and construction space — Madhucon Projects, Unity Infra, Ahluwalia Contracts, Peninsula Land, HDIL, Marg Constructions and Orbit Corporation. All these stocks lost over 85 per cent of their value in the market crash between January 2008 and March 2009; but turned around to give a stupendous 300-400 per cent return since.

One surprising trend that emerges is that the multi-baggers in this rally did not attract significant FII buying. Though FII buying was clearly the trigger for this rally, stocks which rose manifold were not the ones where FIIs pegged up their stakes to the maximum.

In fact, stocks such as McNally Bharat (up fivefold), Madhucon Projects (up fourfold), JSW Holdings (up fourfold) and Unity Infraprojects (up fourfold) were among the top gainers, despite FIIs actually trimming their stakes in these companies in the March-June 2009 quarter.

With the rally driven mainly by hopes of a recovery in earnings and the prospect of a recovery already built into current valuations, from here on market moves may become more selective.

Investors may now need to keep watch on the new sector leaders that are emerging in the recent recovery. If one looks at the sectors that have already moved past January 2008 highs, it appears to be IT, automobiles and FMCGs.

IT, which was beaten down on concerns of the US economy’s poor health and was languishing even after many sectors recovered past the March low, has played catch-up, as recovery signs emerged in the US. And as far as the auto segment is concerned, the recovery started much ahead; it bottomed out in the October trough and started recovering before early 2009.

Hero Honda Motor and Maruti Suzuki are at significantly higher levels than in 2008 peak. Select scrips from commodities — sugar, cement; pharmaceuticals, FMCG too — are riding above the 2008 high. Shree Cement, EID Parry, Godrej Consumer and Cadila Healthcare are among such stocks.

Source: TheHinduBusinessLine