Avoid investing in overhyped stocks is what the year 2018 taught us. Yogesh Supekar and Karan Bhojwani discuss what exactly are overhyped stocks, how to identify them and how they have fared in terms of their fundamentals
Any investor who has spent a decent amount of time in equity markets would have noticed that stock prices move up when profit increases, balance sheet gets stronger, margins improve, debt gets reduced and sales grow at a faster clip. It is only logical to expect the prices to go up when such fundamental triggers are available for any stocks.
Also, it is quite possible that you may have seen stock prices soar even when the earnings are flat, balance sheet stands unrepaired (higher debts), promoter shares are pledged incrementally, margins are struggling to improve and sales de-grow or slow down.
The stock prices take cues from improving or deteriorating fundamentals, alright, but at times the share prices are determined purely on the basis of the popularity of the scrip. The more popular a stock is amongst the investors, the more the demand for the shares! Thus, in practice, the market tends to value stocks based on their popularity and not merely on their fundamentals.
The reality is, in the equity markets, both the scenarios exist and, as a smart investor, you just have to avoid being caught in the hype of the popular stocks that are not supported by fundamentals. The more intense the popularity contest gets for the stocks, more and more investors are found investing in these so-called popular stocks or “overhyped stocks”.
The year 2017, which was a great year for investing, saw investors flocking to invest in overhyped stocks, only to realise that these set of popular stocks were not supported by fundamentals to back the high valuations commanded by them.
What are overhyped stocks and how did they perform recently?
Overhyped stocks or popular stocks are the ones which are popular among investors, primarily retail investors. Some of the characteristics of overhyped stocks are :
1. Overhyped stocks show huge price pop ups with flat earnings per share.
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