Are Bulls driven by company balance sheets?

Rohit Joshi/ZRG

What ticks the stock prices of few companies better than others has always remained perplexing for investors. More intriguing is why few companies even though being financially sound are slow to respond to stock market rally than their counterparts with poor fundamentals. While the Sensex is touching new highs in 2012 thanks to overdue reforms unleashed by the government, the reality that there is no correlation between stock price movements and the fundamentals of the company once again dawns on investors.

Taking a note of all the positive announcements from the Indian government as well from US and Europe, some FII brokerages have upwardly revised Sensex target. For instance Deutsche bank has raised the December 2012 Sensex target to 20K. Citigroup, too, has revised their Sensex target to 19,900 for June 2013, from its previous target of 18,400 for December 2012. Similarly, Ambit Capital has predicted that Sensex might touch 23K levels by March 2014.

Although the market has shown its propensity to move northwards and has already provided returns of nearly 22 per cent so far in this calendar, yet there are some stocks of fundamentally sound companies which have underperformed the broader markets during the period under review. Zee Research Group (ZRG) lists five such companies whose stocks have yet not participated in the rally so far.

Stocks of companies like Praj Industries, Indraprastha Gas Limited (IGL), Biocon, Godrej Properties, and Escorts have provided returns of – 34 per cent, - 32 per cent, - 3 per cent, - 2 per cent, and mere positive returns of 4 per cent respectively during the period under review. The common thing between these companies is that their balance sheets are least leveraged (less debt on books). Besides, these companies have posted decent profits in the recent quarters and they do have good cash in their balance sheets.

On the contrary, there are five stocks of fundamentally weak companies which have outperformed the broader markets during the period under review. Stocks of companies like Jet Airways, Kesoram Industries, HMT, Lanco Infratech, and Punj Lloyd have provided returns of 119 per cent, 75 per cent, 55 per cent, 49 per cent, and 34 per cent respectively during the period under review. The common thing between them is that their balance sheets are highly leveraged. Barring Jet Airways, all companies have posted losses in the recent quarter.

Despite having poor fundamentals these counters have outperformed the benchmark index and this is the trickiest riddle for the investor to solve.

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