Bulls take a fancy to small & mid-caps

Four Out Of Five Stocks Have Doubled Since March

LEFT out of the ongoing bull run? Struggling to make sense of it? Sample these facts.
As many as four out of every five stocks in the BSE-500 index have at least doubled from their lows, most of which were hit in early March.

Of these, shares in 62 companies have risen between 200% and 300%, while 41 companies have risen between 300% and 500%. AtMonday's closing prices, IVRCL Infrastructure and Projects was up 489% from its year-low and up some 225% from its early March level. Real estate companies Orbit Corporation and HDIL have risen 466% and 461% respectively from their 52-week lows.

All this when the BSE-500 index, which represents the best of mid- and small-cap companies, has risen 93% since the pivotal day of March 9. That was the day the market started looking up and is reckoned by many market watchers as the start of the rally. The more closely-tracked BSE 30 index has risen around 80%. The benchmark Sensex ended last week at 15,103 points.

Mind-boggling, eye-popping, too good to be true! Descriptions abound, but for investors who braved it out after betting their wallets on lesser-known stocks when looked as if the future of the capital markets was itself at stake, it's redemption time. Real estate, construction, metal stocks set the pace
THEIR faith is paying off. Interestingly, the best returns have been delivered by sectors, which were all but written off just a few months ago. Real estate stocks, unloved locally and indeed globally after the sector was blamed for many of the woes that have plagued the global economy, have been the biggest beneficiaries of the latest bull run despite the fact that the outlook for the sector is far from rosy.
Construction and metal stocks, again part of sectors still not out of the woods, have been the other two most sought-after.

Of course, most of these stocks had been brutally hammered when the market went into a tailspin in the past quarter of 2008. In many cases, the fall was aggravated by the unwinding of massive long positions that had been built up in the futures segment. On an average, the decline from their all-time highs touched in late 2007 and early 2008, to the lows in October 2008 and March 2009, was anywhere between 60% and 95%.
So what is propelling these stocks as they rise from the depths? Who is driving the action in them?
"We are witnessing huge interest from retail clients. In the past two to three months, there has been a phenomenal increase in our trading volumes as well as new clients," says Divyesh Shah, CEO of Indiabulls Securities, which ranks among India's top five retail brokerages. Brokers say mutual funds, most of which had been sitting on cash until the election results were declared, have turned buyers over the past month or so. Most have, however, been restricting purchases to the top 50 or so liquid mid-cap stocks.

What could explain the sudden appetite for second-line shares, especially since retail investors were bleeding in these very stocks until the upswing began in March this year?
Market watchers attribute the steep rise to a combination of factors, most of them, in market jargon, technical.
Second-line stocks bore the brunt of the selloff that ensued after the markets peaked in January last year. Distress sales by retail and institutional investors sharply reduced floating stock at these counters in the past 18 months, and as a result, when these stocks started shooting up a few months ago, they encountered little selling pressure.
"Many of these stocks, especially in the realty, construction and infrastructure segments, were punished beyond what they deserved. Now that the mood has improved somewhat, investors are once again looking for value," says Manish Sonthalia, vice-president, Motilal Oswal Securities.

Following the recovery in the secondary market, many cash-starved companies are now in a position to raise funds and retire some of the expensive debt that weighed down their balance sheets. Real estate companies have been particularly active raising funds through so-called qualified institutional placements (QIPs) to investors. So while a pick up in demand in the core business may still elude many firms, the threat of bankruptcy that stared at many of them earlier in the year may no longer be there.
But experts warn against being completely taken in by the euphoric mood, saying this ability to raise funds may prove to be a double-edged sword. "We need to look at the equity dilution aspect due to many companies raising a large amount of funds through QIPs," says Mr Sonthalia of Motilal Oswal.
Others say many of these stocks could be overpriced following the one-way rise since early March, and so investors would be advised to avoid them for now.

But there are those who disagree, contending that despite rallying as much as 500%, many of these stocks are still at a deep discount to their peak prices hit during last year's bull run and offer tremendous value.
Take for instance Reliance Industrial Infrastructure. A star performer in the latest bull run having risen 358% in the past three months, it is still just 38% of its all-time high of Rs 3202 at Wednesday's closing price of Rs 1237. In comparison, group flagship Reliance Industries is quoting at nearly 70% of its all-time high price.
Ditto with HDIL, which, after rising 332% in the past three months, is still quoting at less than a third of its peak value of Rs 1114.

Market watchers also say the gains in second-line stocks have been a bit more orderly this time around, as many investors have been quick to book profits, wiser after last year's bitter experience. Several of them exited positions in many stocks, content to narrow their losses, ruefully aware that the peak prices may not return anytime soon.
Meanwhile, brokers expect the upswing in these stocks to continue for some more time as most investors are still sceptical about the prospects of these stocks. "The rise will continue as long as there are more disbelievers," says a broker, a veteran of many booms and busts and ardent chronicler of the market. "The moment euphoria sets in, the dream run will end," said the broker, a heavy hitter in the stock market during his prime but a far more subdued player now.a