Bears on the prowl as markets turn skittish; individual stocks hit hard

Weakened market conditions have emboldened bears to launch targeted attacks on individual stocks. In recent weeks, shares of several high-profile companies, including Cyient, Kalyan Jewellers, Motilal Oswal Financial Services, and Ola Electric Mobility, have seen over a fifth of their value erode within days.

 

Market insiders reveal that bears are homing in on vulnerable stocks with lofty valuations, promoter share pledging, and negative news triggers. Stocks in the futures and options (F&O) segment are also bearing the brunt, as they offer an easy target for short sellers since they are not subject to trading limits, making them vulnerable to intense selling pressure.

 

In some cases, stocks have been subject to bear-mauling on the back of unsubstantiated rumours and allegations.

 

For instance, shares of Kalyan Jewellers hit their all-time highs of Rs 795 on January 2 after more than doubling over the past one year. Despite a strong third-quarter update by the company on January 6, the stock dropped nearly 40 per cent in just 12 trading sessions fuelled by unsubstantiated rumours on social media. The stock price saw little respite despite efforts by the company and also asset management firm Motilal Oswal to address the rumours.

 

“Short sellers may have bet on the possibility of a sharp stock price decline, potentially triggering margin calls on the pledged shares. This scenario could force the promoters to pledge more shares to cover the margin calls,” observed analyst Devi Subhakesan of Investory, who publishes on Smartkarma.

 

“The stock's recent turbulence highlights the vulnerability of high valuations and promoter pledges to speculative attacks. While the company’s fundamentals remain strong, market dynamics and external pressures continue to test investor confidence,” he added.

 

Shares of Motilal Oswal too have come off by over 30 per cent after social media posts alleged that officials of its asset management arm were bribed to make substantial investments in Kalyan Jewellers. The company termed the allegations as "baseless, malicious, and defamatory”. 

 

There are close to two dozen stocks from the top 500 list to have lost a quarter of their value so far this month. If one looks at the overall listed universe, close to 500 now trade at half their peak valuations.

 

The latest victim of bear attack has been Cyient, whose shares dropped 23 per cent on Friday after the resignation of its chief executive officer (CEO) Karthikeyan Natarajan stoked unsubstantiated rumours.

 

G Chokkalingam, founder and head of research at Equinomics Research and Advisory, said a perfect storm of macro and micro challenges has led to a “severe meltdown”.

 

“On the macro front, there are headwinds such as sustained FPI (foreign portfolio investment) selling, weakening of the rupee, and uncertain US policies. Meanwhile, on the micro front there are concerns around lofty valuations, and earnings slowdown,” he said.

 

Experts said investors should tread with caution in the current market environment, especially when it comes to investing in stocks with high price-to-earnings (P/E) multiples or high debt levels, or high promoter pledging.

 

“Several stocks still boast extraordinary valuations, and are most vulnerable. With a P/E growth (PEG) ratio of 1, ideally, earnings should grow by 100 per cent. However, many of these stocks are struggling to achieve even 20 per cent growth. Overvalued and new-age companies are currently bearing the brunt,” said Chokkalingam.