Benchmark indices the Sensex and the Nifty have now hit record levels. The rally has come on the back of three or four stocks, including TCS, HDFC Bank, Reliance and Kotak Mahindra Bank.
Midcap and small cap stocks have plunged as investors have moved money from these stocks to the larger cap stocks. This is largely to protect any large scale damage to their portfolio as political uncertainty, rising interest rates and rising crude prices could weigh on the markets.
The price damage in larger caps is always much less, which is why investors are taking sheleter in these stocks, fuelling a rally in stocks like TCS, HDFC Bank and Reliance, which in turn is driving the Nifty and Sensex higher.
With the Sensex now at near 37,000 points, it makes little sense to chase the large cap stocks.
Bottom-up is the right way forward
This approach assumes that individual companies can do well. It clearly means that you need to forget the index at its peak and focus on individual companies. Several stocks are now trading at 52-week lows, despite the index being at a new peak.
Some of the stocks at near 52-week lows, include names from the metal space. In fact, NMDC, Vedanta and Hindalco, which have seen some modest recovery in their prices, are still way below their 52 week highs.
Investors might see some value here and buy into these names. Apart from this another high-quality name, Tata Motors is also languishing near 52 week lows.
Now, the one reason to be recommending these stocks is that they have fallen dramatically in some cases as much as 30 per cent from peak levels. The point now is even if the markets fall a tad bit, there is very little downside risk in some of these stocks.
Metal and mining stocks like Vedanta, which has presence in everything from copper to zinc to silver remains a stock that could be worth watching. So, is a player like NMDC which is a cash rich debt free company and is the largest player in the iron ore business.
The company's shares would now be available at a dividend yield of near 5 to 6 per cent. Coal India, which is near 52-week lows would also be available at a dividend yield of near 6 to 7 per cent. If you want to hedge your risk in a rising market, these could be good bets, as the dividend yield would reduce the risk of a sharp slide in the stock price.
A fall in large caps like HDFC Bank, Reliance and TCS is possible the way these stocks have run-up. This means that the index would fall, given that these are heavy weight stocks. By using a ""Bottom-up" approach to investing, you might reduce the chance of losses.