subject: BSE Sensex Overvalued? Learn From Top Portfolio Management Services [print this page] BSE Sensex Overvalued? Learn From Top Portfolio Management Services
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After the Sensex crossed the 20000 mark, there is hectic debate whether we are overvalued or not. While I would not like take part in the same, recent developments in three companies, provoke a sense of deja-vu within me and make me a bit uneasy at these levels.
The first one is BPL Ltd. For the past five years, the company's performance has deteriorated steadily (last years minuscule net profit notwithstanding) and the stock was languishing even while the market was rallying for the past eighteen months. However, a few days ago, the stock rose from its slumber and rose 17% in a single day. The ostensible reason reason for this was the rumor that they would be selling some land pursuant to a Corporate Debt Restructuring (CDR) resolution.
The second company is Premier Limited. A notable market expert recommended this company on a TV show eight days ago, stating that they have large tracts of unused land which may be sold in the near future. The stock rose by 12% when markets opened the next day. Now, this company is not in as bad a shape as BPL is, but the reason for the rise in price was purely the land sale and not the intrinsic performance.
The third company is Gitanjali Gems Limited. This is primarily a jewelry exporter. A top official of theirs recently appeared on TV stating that the latest Board meeting had approved potential mergers, de-mergers, spin-offs, acquisitions etc. for the purpose of value unlocking and had appointed KPMG as their advisors. Within a few days of this announcement, the stock has risen 16%. The mere fact that they are seeking to unlock value is enough to push the stock to a 52 week high. Stock prices are supposed to be lead indicators but this is taking it to extremes.
In early 2008, land banks and Sum-of-the-parts (SOTP) valuations were the most common reasons behind stock price surges. Is history repeating itself? Only time will tell.
As investors we should be cautious and not be overly impressed with castles in the air. It is important that you not switch out of good companies (merely because they may be lagging in the recent run-up) and re-invest the same in companies whose promoters promise great things in the future but display little promise today.
