Three trends from the market decline :Business Line,

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Cheaper stocks have fallen more than premium stocks. And mid-caps have outperformed large-caps. These are some of the patterns that have emerged from the market decline that began nearly a year ago.

The strong market upswing that began in March 2009 and culminated late last year pushed up the valuations of a good many stocks. In the bear run since, have these stocks been taken down a peg or two in the light of their premium valuations?

As it turns out, it was the less expensive stocks that were really battered, while markets were willing to allow these stocks to retain their higher valuations. Most stocks that were trading at higher price-earnings multiples in November '10, when the market slide began, have not declined significantly. At the same time, the markets punished stocks which were already cheap.

For this analysis, we considered the trailing twelve-month PE multiples in November 2010 and September 2011 for the CNX-500 stocks. The index itself traded at a PE of 21 times and 15.8 times in the two months. Returns were calculated in the period from November 5, 2010 to September 30, 2011.

VALUATION PREFERENCES

About half the stocks that were trading at PEs above the broad market (represented by the CNX-500 index) have outperformed. Further, as many as seven out of every 10 stocks which were at high PEs in November 2010, continued to trade at premium valuations by the end of September 2011. For instance, Cipla, which was trading at a PE of 28.1 times last November, curtailed its decline to under 20 per cent and is now at a valuation of 23.5 times. Similarly, Titan Industries traded at a valuation of 51 times in November 2010. The stock gained 9 per cent by September, and trades now at 38 times.

This trend contrasts sharply with those stocks which were trading cheap. Stocks in this basket found themselves at the receiving end of the selling spree, with over 60 per cent falling far more than the broader market. Take the stock of Sintex Industries. The stock traded at a valuation of 16 times that of November '10. It lost 43 per cent since then and is now at a PE of 7.3 times.

SECTOR PREFERENCE

There was also a sector angle to the stocks that held up. Stocks in consumer-based sectors such as paints, FMCG, gems and jewellery have all had a large number of out-performers. Stocks which suffered very steep falls — over 50 per cent — were concentrated in just a few sectors — infrastructure, shipping and realty.

The list of stocks with moderate falls of 25-50 per cent was, however, dominated by banks, metals including steel, power and petrochemical companies. Besides these, stocks belonging to the infrastructure and real estate sectors turned up with alarming regularity to feature on the losers list.