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Investors' dilemma: What looks cheap is not safe and what is safe is not cheap

Liquidity has flowed to a few stocks which have shown relatively better earnings, and over the long-term experts feel that stock prices will mimic earnings growth.

August 13, 2019 / 01:19 PM IST

At a time when everything seems to be heading south, investors are facing a tough choice over what to buy. No price seems to be good enough, even though nearly 20 percent of the BSE500 stocks are trading at a 50 percent discount to their 52-week highs.

Stocks trading at such levels usually look attractive, but the question is are they worth a buy? “What is looking cheap might not be safe, and what is safe might not cheap,” is the conventional wisdom.

Among the 88 companies that are down over 50 percent from their 52-week highs are Reliance Power, Reliance Communications, Jaiprakash Associates, Vodafone Idea, HEG, Srei Infrastructure, Yes Bank and Jain Irrigation System.

Here are Top 20 stocks of the 88 that are trading at a discount of over 50 percent from their respective 52-week high. The stocks are for reference only and not buy or sell ideas:

Fall from 52-week high


The biggest victims of the recent fall were the small and new investors, who entered the market in the last three to four years and had never seen such a crisis, Kedia Securities managing director Vijay Kedia told Moneycontrol.

“But, this is the reality of the stock market. Remember, my statement: There are four caps—large caps, mid caps, small caps, and the bhangaar (junk) cap. Almost 90 percent of the stocks come into that last category and unfortunately, 90 percent of the new investors invest in that category, and I feel sad,” he said.

The S&P BSE Sensex is down 7 percent from its record high of 40,312 clocked in June. Indian markets failed to keep the momentum post June, as concerns over US-China trade talks, muted earnings, geopolitical tensions, corporate governance issues, central bankers commentary and currency wars capped the upside.

June quarter earnings have largely been muted, with experts saying that the markets’ trajectory will be guided by earnings recovery.

“The market has been polarised since 2018 with a few stocks driving the large cap indices like the Nifty and the Sensex. There are very few stocks which have given confidence on earnings in the past couple of years and there has been a scramble to get into these names,” Mihir Vora, director and chief investment officer at Max Life Insurance, told Monneycontrol.

On the other hand, earnings growth for the Nifty were a meagre 3 percent annualised over the past five years, he said. Pressure on margins and increasing interest costs for manufacturing companies in most sectors (consumer, cyclical, commodities), and non-performing assets in banks had dragged down Nifty profits. “Thus almost 80 percent of the returns from the market are due to an increase in valuations,” he said.

Liquidity has flowed to a few stocks that have shown relatively better earnings and over the long-term, experts feel, that stock prices will mimic earnings’ growth.

“At current levels, the Nifty is trading close to its long-period average and if we segregate valuations into what can be attributed to the near-term earnings, compared to long-term earnings growth, about 1/3rds of the Nifty companies are trading at very reasonable value attribution to long-term earnings,” Pradeep Kumar Kesavan, senior vice president, institutional equity research, of Elara Capital told Moneycontrol.

“This means that markets are not fully pricing in the earnings growth potential for these companies. The broader markets have experienced a much deeper correction and we believe that there are good pockets of value there,” he said.

Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
Kshitij Anand is the Editor Markets at Moneycontrol.

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