Revamp Your Portfolio To Undervalued Counters

Stock markets are running low on gas. After being on a tear in March and April, signs of fatigue are beginning to crop up. The Sensex's level of 26,000 is proving to be a big hurdle to cross. Last week, markets started off on a good note, but began to taper off in the latter half of last week.

All the good news is done and dusted. Stock markets have discounted a fiscally prudent budget and expectations of a better monsoon. Now it wants to look ahead for some more positive cues and news. Perhaps a better than expected results, or a strong pick-up in the economy can be the trigger. But for now, consolidation is the buzzword.

As we know stock market investing is all about risk and reward, the time has come for investors to focus on the risk side of the portfolio. Reducing risk should always be at the core of one's strategy. One of the ways to do this is to incorporate some beaten down names into your portfolio.

Many stocks have gone up in the past two months. This calls for a portfolio shuffle away from some companies that have risen purely on price front with no visible improvement in earnings to companies that can improve their earnings and yet have not moved up significantly.

Where a lot of people go wrong in the markets is when they start chasing some of the names that have already run up significantly. This increases the risk of a portfolio significantly. The tiniest of steps taken to reduce risks are better than trying to chase the gains made in the last 6-7 weeks.

This week investors will be watching the US Fed. It is one of the most-watched events which will see investors stay up way into morning to dissect the post-meeting notes. This becomes crucial because over the past many years, global markets have become so used to the intravaneous shots of liquidity that any talk of a rate hike has a direct impact on markets. Stocks can react in a jiffy if the US Fed does not keep rates low and especially as inflows into emerging market have been ETF driven. Long only funds are yet to make an entry into Indian markets that can counter these hot money inflows.

So a change of tack of one's portfolio wouldn't be out of step in keeping with the increasing price points of the markets. A fairly good place to start is to aggregate the price-earnings multiple of the stocks in the portfolio and see where it stands in relation to the market. The current PE of the market is around 18 times future earnings.

If your portfolio has a higher PE, you might want to review the reasons why it is high, and then make tactical shifts to inexpensive counters. Of course, at all times keep the growth of the companies into perspective.

As an investor, it's important to constantly lower the valuations of your portfolio, and try and build what the gurus call a 'margin of safety.' A higher price portfolio increases risk, and lowers margin of safety, and vice versa. After all, stocks are higher now, so instead of chasing the market fads, a little risk reduction won't do any harm.