Street buys into quality stocks, only

There's a sharp divergence in the performance in Indian stocks as investors shun companies with bleak prospects in favour of those with sound fundamentals.

Last fortnight, 206 companies from the BSE-500 hit 52-week lows as investors sold heavily in counters with dimmed prospects.

However, 15 companies in the BSE 500 hit 52-week highs as foreign investors shifted their focus to companies with better growth prospects.

Around 42 per cent of the stocks that are near their their 52-week lows are from sectors such as banks and finance, realty, power, capital goods and infrastructure sectors. Banking and finance stocks are among the worst performers, comprising nearly 16 per cent of the worst performers.

Stocks of heavily-indebted companies were also among the ones beaten.

Says Motilal Oswal, chairman and managing director, Motilal Oswal Securities: “Investors are clearly avoiding stocks that are heavily-leveraged or where there are political or other corporate governance issues.”

The performance of these 206 companies have also been a cause of worry for investors as their revenues slumped eight percent and profits dipped 9 per cent in FY13.

Liquidity has also reduced considerably as trading volumes have reduced. Says Nirmal Jain, chairman and managing director, IIFL: “Most of these companies are not liquid and foreign investors are clearly avoiding companies in mid- and small-caps.”

By contrast, investors are favouring stocks in sectors that are better placed to withstand the slowdown, some of which have hit new 52-week highs.

Says Jain: “Investors are clearly concentrating on just 20 or 30 stocks and avoiding all other stocks.”

Sales and profit growth of stocks at 52-week highs stood at 25 per cent, respectively, for FY13.

Experts reckon that this is a sign the market is getting increasingly polarised in favour of larger, more stable and profitable companies.

Experts also contend that the divergence between leaders and laggards is likely to continue as foreign investors have become selective.

Companies that have hit lows are are not expected to see a reversal anytime soon. Says Oswal: “Right now the situation is very fragile and it's difficult to say when the sentiment will improve.”