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Irrational Advances

A curious state of affairs has seen some companies surprising everyone with their huge market gains

In the absence of any positive new triggers, a number of companies, across various sectors of the economy, have emerged as the highest gainers on the bourses which, by standard reckoning, should really not have been the case

While no one can say with any amount of certainty that this is the start of the new bull rally or a short-term upswing in the market in the midst of a long bear phase, yet one thing is for sure, that the market sentiment, working under some ephemeral force, has been driven into positive territory and this is what is driving indices up -- since March 09, 2009, Sensex has gained nearly 79 per cent to May 29, 2009.

In the short-run, investors’ sentiments do tend to become one of the strong drivers of stock markets. At times these sentiments could be totally irrational. As such, even if there is no major change in a company’s fundamentals, a positive attitude can still guide the company’s share price to new heights. These sentiments are built, and acquire momentum, on the basis of day to day news available to investors, no matter how nebulous its nature. Investors’ reaction then guides the performance of certain stocks in the short-term to some astonishing results.

For instance, in the current market rally, BSE Realty index is the top performer among all sectoral indices as it has turned in a huge gain of 193 per cent, in spite of the fact that there has been no improvement in the condition of the companies in this sector. They are still highly leveraged and are currently booking falling sales, they are starved of cash to even run their day to day operations. Not only this, it was the worst-performing index in 2008 with a nearly 82 per cent fall.

It is a clear indication that stocks that log quick gains may also see the fastest decline. However, seeing these kinds of abnormal gains that are played up on TV and the other media, one might find it difficult not to participate in the market. But, an investor should always remember that investing is like lending someone your hard-earned money and if one does that without inquiring about the ability of the borrower to repay, then one is basically speculating, not investing. 

As a corollary of this particular advice, we list here 10 stocks, among the BSE 500 companies, that managed to log great short-term gains.

As the realty sector was one of the key beneficiaries of the current market rally, there are some companies like Housing Development & Infrastructure (HDIL), BL Kashyap & Sons, IVR Prime Urban Developers, and Puravankara Projects whose scrips chalked up gains of more than 200 per cent on the bourses, but the earnings performance of these companies has not been impressive at all. While HDIL, IVR Prime Urban Developers and Puravankara Projects saw their quarterly profit decrease in last three quarter of FY09, the other two real estate companies have not yet declared the latest quarterly results, but even their profits were on a downward spiral in the first three quarters of FY09. With such a state of affairs among the real estate companies, how will companies related to this and infrastructure sector, remain far behind. SREI Infrastructure Finance, an infrastructure finance company whose primary activity is financing infrastructure equipment and projects, saw in the first three quarters its profits dropping from Rs 32 crore to just Rs 2 crore. This company in the recent rally has been able to turn in 244 per cent in return. Truly the market players must know something about the company that is not reflected in its results.

Fate of ICSA (India), a solutions provider and infrastructure deployment for the power sector, is also tied up with the infrastructure sector. The company in its recent quarter saw its profits going down and down. In the last quarter its profits went down 24 per cent q-o-q. But investors are betting on the longer term potential of this stock, the price of the stock since March 9, 2009 has gone up by 228 per cent.

Aban Offshore the bad boy of 2008, when it stock tanked 86 per cent on the fear of company defaulting on its debt obligations is the blue-eyed boy of today. Between March 9, 2009 and May 29, 2009, the stock has gained 290 per cent, though its debt are still outstanding and more importantly the deadline to repay its loans are now nearer than it was last year.

India Infoline, a brokerage company has been in the limelight the moment the stock rally started. Though the company’s fundamentals are going the other way, its stock price got a boost of confidence with a couple of bulk trades in the stock. Since then the stock has never looked back, it has turned in over 270 per cent return.

In the US-dependent IT sector, which is facing a challenging environment after outsourcing acquired a bad name there and demand dropped after the sub-prime crisis, relief did not seem to be on the horizon. Tanla Solutions, which is engaged in providing technology services and solutions in wireless communication industry has seen also seen a 43.39 per cent decline in net profits in the Q3 of FY09. Although its stock jumped more than 267 per cent in the bull rally, it was.

Jai Corp had earlier dabbled in manufacturing of steel and plastics, but is now focusing on the infrastructure space. It saw a decline of 37 per cent in total income and its profit after tax (PAT) fell by 21 per cent for the October to December quarter of FY09. However, in the recent rally, its share price rose by more than 265 per cent. Even near-term history was not backing a boom for the company as its scrip, in the market crash of 2008, lost almost 94 per cent of its value.

The hospitality business fared no better. Country Club India has managed to lose around 93 per cent of its value in 2008 during the market crash, but in this rally it has gained more than 140 per cent. The data flowing from the company was certainly not backing an upturn as its standalone net profit saw a fall of 45.71 per cent in the Q3 of FY09.

(Checkout: Track the share price movement of your stock using My Portfolio)

Investors who do their home work properly, stick to basic investing principles and don’t chase every market rally, would know that investing in equity is all about long-term gains and they would therefore, tend to ignore the importance of the recent uptick. Instead, they would be eyeing the gains they will book in the time period they assigned to it to fulfil a goal or a need for which they had earmarked their investments. 

 

On the Fast Lane
     Return (%)    QoQ Change (%)        
Company Name    Bull Run    2008    PAT    Operating Profit    Price    PE
Housing Development & Infrastructure   347.60   -84.44   -66.51   -5.90   284.00   10.85
Aban Offshore   290.74   -86.41   -16.16   -7.05   905.35   13.39
BL Kashyap & Sons   289.00   -88.34   -33.24   -25.54   397.95   7.30
India Infoline   269.79   -86.75   -44.41   -36.93   151.80   41.53
India Infoline   266.90   -81.02   -66.29   -29.53   79.80   10.25
IVR Prime Urban Developers   257.92   -91.03   -279.57   -144.95   89.30   66.69
SREI Infrastructure Finance   244.32   -84.78   -85.55   -47.68   77.30   13.90
Country Club   240.34   -92.74   -45.71   -10.47   24.30   5.59
ICSA   228.33   -78.34   -24.68   -8.35   181.40   5.06
Puravankara Projects   209.34   -89.25   -11.84   -14.29   107.65   17.28
Bull Run - (March 9, 2009-May 29, 2009)
Price related data are as on May 29, 2009