Many small investors are perplexed about the rangebound Sensex over the past 10 months – trading between 15300 and 18300 in a slightly upward sloping channel.
Of late, the Sensex has been trying to break above the trend line connecting the tops. But every time it has fallen back into the trading range, despite continuous buying by the FIIs.
So what gives? There could be two possible reasons. The first is that most of the Sensex stocks appear fully valued or even over-valued, so action has shifted to the mid and small-cap stocks. The second is that some Sensex-constituent stocks are performing very well, while others have lagged the Sensex.
Trying to analyse the possible first reason would require access to FII buying and selling data that I do not have. It is based on anecdotal evidence. But the second reason can be verified more easily with a quick, back-of-the-envelop calculation.
Here is what I gathered, by comparing the closing prices 10 months ago with that of today’s prices:
| Sensex stocks | Price on 12.10.09 | Price on 12.08.10 | % Gain/ (Loss) in 10 months |
| ACC | 796 | 837 | 5.1 |
| BHEL | 2424 | 2496 | 3.0 |
| Bharti Airtel | 351 | 318 | (9.4) |
| Cipla | 298 | 314 | 5.4 |
| DLF | 425 | 316 | (25.6) |
| Jindal Steel and Power | 619 | 656 | 6.0 |
| HDFC | 2758 | 2991 | 8.4 |
| HDFC Bank | 1700 | 2075 | 22 |
| Hero Honda | 1631 | 1867 | 14.5 |
| Hindalco | 129 | 167 | 29.5 |
| HUL | 290 | 266 | (8.3) |
| ICICI Bank | 893 | 964 | 7.9 |
| Infosys | 2240 | 2779 | 24.1 |
| ITC | 129 | 153 | 18.6 |
| Jaiprakash Associates | 160 | 119 | (25.6) |
| Larsen and Toubro | 1657 | 1805 | 8.9 |
| Mahindra and Mahindra | 458 | 633 | 38.2 |
| Maruti Suzuki | 1516 | 1226 | (19.1) |
| NTPC | 210 | 195 | (7.1) |
| ONGC | 1245 | 1267 | 1.8 |
| Reliance Comm | 248 | 173 | (30.2) |
| RIL | 1084 | 972 | (10.3) |
| Reliance Infra | 1357 | 1095 | (19.3) |
| SBI | 2173 | 2784 | 28.1 |
| Sterlite | 170 | 168 | (0.01) |
| TCS | 581 | 855 | 47.2 |
| Tata Motors | 550 | 1024 | 86.2 |
| Tata Power | 1319 | 1329 | 0.01 |
| Tata Steel | 546 | 520 | (4.8) |
| Wipro | 344 | 413 | 20 |
| SENSEX | 17027 | 18074 | 6.1 |
Only 13 stocks have outperformed the Sensex in the past 10 months. 1 stock was an equal performer. The balance 16 underperformed the Sensex. Not a very scientific experiment, but one that may give us clues for taking investment decisions.
1. The IT pack – Infosys, TCS, Wipro have outperformed
2. SBI and HDFC Bank have outperformed; HDFC and ICICI Bank have marginally outperformed the Sensex
3. Hindalco has outperformed, but Sterlite and Tata Steel have underperformed
4. Hero Honda, M&M and Tata Motors have outperformed; Maruti Suzuki has underperformed
5. Tata Power and NTPC have underperformed; Jindal Steel and Power have given equal performance with the Sensex
6. Bharti Airtel and Reliance Comm have underperformed
7. ITC has outperformed but HUL has underperformed
8. ONGC and RIL have underperformed
9. ACC, BHEL, DLF, Jaiprakash Assoc, Reliance Infra have underperformed; L&T has marginally outperformed
10. Cipla has underperformed
One school of thought says: Tend the flowers and pull out the weeds. Translated into English, it means hold the outperformers and get rid of the underperformers.
While that may be sound logic, it may not necessarily make good investment strategy. If the Sensex has to move above the trading range, the outperformers have to keep performing, but the underperformers need to pick up the baton and start running.
In other words, if you believe that the Sensex is going to move higher, a contrarian bet on the underperformers is likely to provide good gains. That is not a blanket permit to buy all the underperformers. One still has to do due diligence.
This may not be a bad time to pick up Tata Steel, RIL, Sterlite and, on dips, HUL, NTPC, BHEL. The telecomm sector is best avoided.
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