Is it the Right Time to Buy Sugar Stocks?

Investor Query: I am looking at sugar stocks which are looking attractive at these prices like Dwarkesh, Dalmia Bharat, Triveni, Balrampur Chini, Dhampur Sugar etc. Need your inputs and is it the right time to pick and if so which one do you suggest.

MarketSmith India Response: 

After a superb rally during 2016-2017, sugar stocks have come under a bit of pressure recently. The stocks that you have mentioned have fallen 40-50% from their all-time highs and have breached key support levels of 50-day and 200-day moving averages.

Sugar supply remains high across the country, while demand for it has been subdued, leading to a substantial fall (almost 20%) in sugar prices.

The Indian government did its bit to provide support to falling sugar prices by hiking the import duty to 100% from the earlier 50% a couple of weeks back. Since then, a majority of sugar stocks have found some support. However, they continue to trade below their 50-day and 200-day lines with poor relative strength and high overhead supply (difference between current price vs 52-week high).

Overhead supply represents price levels at which a stock’s recovery is hampered as it tries to rally back from a steep decline. That pressure comes in the form of investors who bought at the earlier, lofty prices and are waiting for the stock to recover just enough so they can sell and break even. That’s human nature, to avoid a loss as much as possible.

This wave of selling will limit a stock’s progress, unless there is overwhelming demand. For example, let’s say a stock makes a run from 50 to 100 a share, then tumbles back to 75. Now, suppose you buy at that level, chances are you’re facing those folks who bought at the 80-95 level. As soon as the stock is back around their purchase price, they will unload shares and the stock could continue to face resistance.

Conventional market wisdom says to buy low and sell high, but overhead supply is one reason to buy stocks at or near their 52-week high. At those levels, there is little or no resistance to work through.

However, for all those sugar stocks, you might not need to wait for them to make 52-week highs. Having said that, we suggest you should at least wait for the stocks to settle down and form a new base pattern. A strong breakout then could serve as an ideal entry point, considering they meet other CAN SLIM criteria.

Moreover, the current market condition of Uptrend Under Pressure warrants a cautious approach. Just because these stocks have fallen 40-50% from their 52-week highs, it does not make them attractive. Fundamentals have certainly changed with fall in sugar prices and so has the market condition. A CAN SLIM investor would hold back from entering these stocks now.

The above query was originally asked by a MarketSmith India user via the Ask MarketSmith feature.

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