Markets are on a correction mode. I still do not think we are anywhere in bear territory. I do not see the market at any kind of ‘bargain’ valuation. What is happening is that the bull added a lot of froth to the market and we are seeing the froth coming off.
I just cast a look at a few stocks;
EID Parry, VIP Industries, Patel Engineering as some stocks from the microcap segment. They all have halved from their highs, but still trading at thirty times earnings, with poor ROCE/ROE. The only way they can justify these prices is if they throw up higher ROCE/ROE numbers.
And if you glance at the MNC stocks- they are still at the upper end of their P/E bands. The risk reward ratio on investing is still some distance away. Two things can happen:
- Prices will continue to stagnate in a narrow band. Over time earnings will catch up and the chase can resume;
- Prices will drop and make the stocks attractive enough to buy.
Buying at today’s prices do not make good sense. Of course, there could be some stray stocks that have cracked and become interesting. Those opportunities can be found in every market.
I also suspect that the commodity prices are playing a havoc on most companies as earnings tank and stocks slip to far below their book value. In other words, some balance sheet plays could be emerging. Metal stocks are trading close to or below replacement costs. The only fly in the ointment for me is the ‘trust’ factor on most of the companies in this sector. However, it would not be a bad thought to start building up a small portfolio ( limiting total exposure to under 20% of equity allocation) of commodity stocks. And of what you allocate, buy just one fourth. I do not know how far away the reversal of the commodity cycle is. It could be one to ten years. Depends a lot on how the world is going to adjust to lower growth numbers going forward. And the ‘X’ factor- China. Even then, some interesting numbers from companies like NALCO ( should check out their 2014-15 annual report) are worth analysing and exploring. Even though it is a PSU,with a cash balance of nearly 4000 plus crores and market cap of 8000 crores, the stock looks very interesting.
So, time to start tracking stocks- And go easy on your cash. Maybe a big crash could be on the way and great buying opportunities ahead? Do not know. But definitely a time to start exploration.