Investors must follow bottom-up approach in stocks

The Sensex (^BSESN : 18143.99 -28.84) is at 18,000-plus points, just 16% away from its all-time high. Despite concerns over the sustainability of global recovery, the Sensex has kept on rising. This comes from the smart recovery in Indian economy and a projected growth rate of 8.5%.

India has planned infrastructure spending over Rs 2lakh crore. This has helped the corporate sector perform better and resulted in rising valuations of large cap Sensex companies. These companies were hammered in the wake of the global economic slowdown after the Lehman Brothers bankruptcy.

Therefore, it is seen that in the rally from 8,000 to 18,000 points, Sensex stocks like Infosys (INFOSYS.BO : 2864.05 -9.35), Bhel (BHEL.NS :2507.6 -17.3), SBI (SBIN.NS : 2619.35 -26.35), RIL (RELIANCE.NS :1000.1 -6.95) etc were the outperformers, where retail investors had little exposure. In fact, retail investors continued to exit such shares with every rise on the premise that the rally would not sustain. Thus, one theory suggests that even though the Sensex is over 18,000 points, we are still at 10,000 points, except for a few stocks which are part of the Sensex. If this is to be believed, then there are more opportunities for making good investments out of the Sensex companies.

Investors need to apply themselves in picking the under-performers. In simple terms, even assuming that Sensex is range-bound between 17,000 and 19,000 points, Sensex stocks have limited space on the upside. I cannot see SBI or RIL outperforming the 30-share index, but at the same time, stocks which are under-performing could outperform as there is no correlation with the benchmark but direct relation with the infrastructure growth.

It is also to be understood that small investors are not safe enough in India. There are always chances of investors getting stuck in stocks run by fly-by night operators. Circular trading to create artificial volumes still exists, though regulators are doing their best to prevent such practices. If investors take necessary measures, they will not only help regulators but also themselves and not fall prey to investments in stocks which exist only on paper. I think the best way is to rely on research provided by neutral agencies. NSE (^NSEI: 5439.25 -7.85) and BSE have taken positive steps in this direction and have made arrangements with some professional agencies to make such research easily available.

Some signs of slowdown are seen in sectors like cement, which clearly suggest the road ahead won't be be very smooth for retail investors. This could make investment in Sensex component stocks a bit risky. In short, investors must follow a bottom-up approach and not top-down, considering the fact that Sensex at 18,000 is expensive compared to the global peers and it is only liquidity which is driving the market.

BY Yahoo