Partial Profit-Booking : Is It The Right Time Now?
Booking profits on regular basis is important. One can look at booking partial profits in those counters where the PE has expanded the most and it looks like the multiples may not be sustainable. Yogesh Supekar discusses in detail on how to go about booking profits and which parameters one should use.
With the dream run yet in motion for the equity markets, experts and market participants across the board are anticipating a market correction. And though market correction is healthy for the markets, what the investors are worried about is a ‘market crash’. However, the crash is not happening, not yet at least, and it is not even helping the bears to go through any meaningful correction. This may comfort the bulls; however, there is no doubt that the markets are trading at elevated levels and these may not be sustained unless the earnings support and the global markets continue to trade in the bullish zone.
If we look at the markets closely, the current streak is the longest in 20 years when it comes to continuous days for which zero out of 30 BSE Sensex stocks have hit a 52-week low. The momentum is even stronger in the mid-caps and small-caps. It is worth noticing that the consecutive months of positive closes in mid-caps and small-caps is the highest i.e. mid-caps have recorded the 13th consecutive positive monthly close. We have at least 592 stocks that doubled in 2021 while two stocks jumped higher than 1,000 per cent in 2021 alone. An impressive 18 stocks have delivered returns in excess of 1,000 per cent in one year while 101 stocks have jumped higher by more than 500 per cent in the past one year.
A whopping 1,286 stocks more than doubled in one year alone. When one looks at these statistics about market performance, one gets a feeling that this cannot get any better. As long-term investor Pankaj Jaggi puts it, “Needless to say, at this moment I am more than happy to have invested in the equity markets in times that have been challenging as the rewards have far exceeded the risks. Most of my portfolio stocks have more than doubled. Now I am little confused as to whether I should book profit or continue holding the multibaggers I am sitting on and most importantly, should I add to my current holdings?”
“I am not sure if I have a clear answer to any of these questions; however, my anxiety grows as markets inch forward and I do not want to miss the opportunity to make money while I also do not want to regret not booking profits if the markets correct from the current levels,” he adds. Indeed, it is an extremely difficult situation to deal with when the markets are in a position of all-time highs and showing signs of volatility but not leading to a meaningful correction as well. In such an environment it is important that investors identify the areas not to invest in and the stocks one should avoid.
Which pockets in the market are looking expensive at this point?
The current rally has seen a strong leg up specifically in mid-caps and small caps. The stock which trades circuit to circuit looks costly. In the last 15 months, stocks already have multiplied themselves more than 3-5 times. The much-awaited sector-specific rally also seen in this environment, specifically sugar counters and IT mid-cap counters may face profit-booking. Banking stocks are already underperforming in the last three months and may lead to profit-booking.
Which stocks would you advise to book profits?
All stocks which are known for their circuit to circuit run should be considered for profit-booking. Stocks like ADAG Group, Adani Group and sugar counters like Shree Renuka Sugars, Bajaj Hindustan, Rana Sugar are prime examples. Stocks that have given more than five times’ returns in the last year and all those stocks which are currently into the trade to trade segments and consistently in the upper freeze should be utilised to book profits at this moment. Stocks which have pledged more than 30 per cent of the promoters’ shares also need to be exited from. While profit-booking, these stocks normally get hit badly.
Bonanza Portfolio
PE Expansion
Investors can focus on those stocks where a major percentage of PE expansion has happened in order to identify overvalued stocks and also to book profits if they are already sitting on some of these high-fliers. Bullish markets tend to see PE expansion. The markets went through a huge PE contraction in March 2020 and since then they have been in an uninterrupted uptrend. Such a phenomenon has expanded the PE of several stocks across sectors and across market capitalisation. One can look at booking partial profits in those counters where the PE has expanded the most and looks like the multiples may not be sustainable. If PE expansion is seen and the growth outlook is not very bullish, one can look at booking profits, at least partial. One can use the combination of high PE expansion and weak earnings’ outlook to decide on which counters to book profits in and also to avoid. The following table highlights those small-caps and mid-caps which have seen maximum PE expansion.
As the mid-caps and small-caps continue to make record highs and outperform there is an increasing sway of opinion that the risks have increased when it comes to investing in the broader markets. In such a scenario investors can focus on quality mid-caps and small-caps using the PEG ratio and PE expansion observation and club it with earnings’ outlook. Stocks belonging to the BSE Small-Cap Select index and BSE Mid-Cap Select index can be chosen for long-term investing.
Stop Chasing Multibaggers
Given the fact that the markets have created so many multibaggers in the past one year and even in 2021, expectations from the stock markets are at an all-time high. Investors will have to have realistic expectations from the markets and need to stop chasing multibaggers. Right now the attitude amongst the investors seems to be like – ‘multibaggers or nothing’. While investing the trick to wealth creation is to invest for the long-term and avoid making mistakes. It could be a costly mistake to chase multibaggers.
The desire to identify ‘quick multibaggers’ needs to be curbed in times like now as there are some visible headwinds for the markets such as valuations, crude oil prices, unresolved pandemic issues, inflation, and others. One needs to be especially cautious on those stocks which have already more than doubled and are trading with extremely high PE multiples. One has to study and identify the triggers behind high valuation. Route Mobile for example belongs to the technology sector and may fetch premium valuation for itself. Stock-specific valuations need to be scanned.
A point in case is the sugar stocks some of which are definitely trading at unsustainable PE multiple after the current rally. To identify if the stock is overvalued, PEG ratio, technical charts signal and peer comparison along with the study of PE expansion can be extremely useful. Shree Renuka Sugars is trading with a PE multiple of 149.22 after rising 285 per cent in one year and gaining 226 per cent in 2021 alone. Other sugar stocks with above average PE multiple are Vishwaraj Sugar Industries with PE of 65 and Parvati Sweeteners and Power trading at a multiple of 41. The table below highlights some of the top performing sugar stocks.
Gaurav Udani
Founder & CEO, ThincRedblu
"It is important to first define the timeframe of your trade"
As of now, which stocks look weak on the charts?
JSW Steel looks weak to me. The charts suggest distribution is in progress in the counter and while we may not see a downward trend as yet, but if I was holding this stock, I would use a tight trailing stop to protect accumulated profits. Larsen and Toubro has significant resistance at the 1,600 level and I expect a decent correction here before it resumes its upward journey, If this was a trade, I would look to exit below the 1,440 level and if I was a investor, I would wait till 1,300 before I exited. TCS has a massive divergence with its RSI indicator; this has been in play since January 2021. I would exit if the price were to breach and close below 3,000.
How does one estimate when to book profits by looking at the charts?
You can approach this in multiple ways depending on what kind of a trader you are and how conservative or aggressive you want to be while you exit your trade. It is important to first define the timeframe of your trade. If your original entry was done keeping a time horizon of a few days then you need to use the daily timeframe, while if you took a position with a longer holding period in mind, you need to use the weekly timeframe for your charts. This is something traders often miss and end up either exiting very early or too late.
The possible exit rules are:
✓Use a fast-moving average. If the price of the stock closes below its 10-period moving average, exit.
✓Use previous resistance as your stop. Stock prices leave a trail of support and resistance zones as they move through time and these can act as good points to plan exits. One thumb rule here is: the larger the timeframe, the more relevant these zones are.
✓Use 20 day per week low as an exit parameter. This is something I used with great success in 2008 when prices plummeted very fast. Fortunately, I exited most positions once they broke the 20-week low.
✓If there is a divergence between the stock price and its RSI indicator, something is not right and you should protect capital by planning to exit.
"In the stock market, you can be right for the wrong reasons or wrong for the right reasons."
-John Allen Paulos
"Stocks are bought on expectations, not facts."
-Gerald Loeb
Losers on a Winning Streak
The bull markets have an uncanny knack of pushing the equity prices higher for a majority of stocks including those which lack fundamentals. Investors in bull markets should avoid focusing on loss-making companies. Even though turnaround companies can generate quicker and higher return and thus create a new opportunity, not all loss-making companies can be turnaround stories and not all penny stocks which are lossmaking may be able to survive and become profitable. Strictly avoiding investing in loss-making companies can save loads of capital for the investors. Unless and until one knows the triggers behind the stocks, investing in stocks that are lossmaking may burn capital quicker than one’s estimate. Some of the negative PE companies that have more than doubled in 2021 alone are highlighted below:
Conclusion
The bullish trend has led to several bubbles in the markets. A bull market always creates a sense of euphoria which leads investors to increase their risk appetite. With increasing risk appetite the focus of investors shifts from quality stocks to trending stocks or momentum stocks. In fact, momentum stocks are nothing but those stocks displaying improving price trends. Under the aegis of momentum gainers and momentum stocks investors are then pitched several low quality stocks to invest in by the so called chartists and the analysts of the world. Only smart and discerning investors can identify the difference between the trending of a top quality stock versus a poor quality stock.
It may need the know-how of technical analysis and fundamental analysis to accurately identify a quality stock trending with momentum. Taking into account the inflation fears, IPOs flooding the markets, pandemic-driven restrictions not fully removed, rising crude oil prices, rising commodity prices and the markets priced to perfection, it only makes sense to book partial profits and take some money off the table and park funds in quality defensives or quality names where the business will grow with very good certainty no whatever the market does. It is useful to remember that good business will keep growing no matter what the markets do in the short to medium term.
Also worth understanding is the fact that the equity markets never crash more than once for the same reason and so for the market to crash we will need a fresh trigger which is not visible right now. The sectoral rotations are in play in full swing and the rotations are happening at record speed. For example, in the week gone by i.e. July 5-9, newly listed stocks outperformed along with real estate stocks, metal stocks and private banks. Investors can use such rotational rallies to take some money off the table in those stocks identified as overvalued and fundamentally weak.
While the outlook for the markets remains strong and the bull rally is intact, what one must not forget is to get rid of poor quality stocks and stock to quality. The bull markets will give perfect exit opportunities and one must use these opportunities fully. Smart churning and switching to the right quality of stocks is required to beat the markets. Sector allocation and stock selection will be especially important as we progress. Timely profit booking and maintaining appropriate portfolio weightages will prove to be extremely profitable when the markets are getting volatile at record highs.