Short Call: Page Industries, Cummins India, Info Edge abuzz, whiff of treasure in trash, copper gets a dent

Brokers say if nothing, a virtuous cycle of passive fund inflows should help sustain the current momentum.

People worry about the riskiness of stocks, but bonds can be just as risky.  - Peter Lynch

Expect bulls to go berserk with the US reaching a tentative deal to resolve the long-drawn battle over the raising of its debt ceiling. The market is divided on whether the latest development sets the stage for a lasting rally, or if it signals a near-term top.

Dalal Street bulls point to a better-than-expected quarterly earnings season and the fact that interest rates may have peaked. Bears contend that there are enough signs of the economy slowing and that valuations are capturing most of the upside. Brokers say if nothing, a virtuous cycle of passive fund inflows should help sustain the current momentum.

Page Industries

The stock took a beating on Friday - down 9 percent - after fourth-quarter numbers fell short of what the market was expecting. The management had warned of a weak consumer sentiment way back in last December, and said it would be hard to hike prices even if cotton prices rose. In other words, it had little pricing power. Still, bulls chose to take a chance, looking at past returns and ignoring the fact that promoters themselves have pared their stake for two quarters in a row.

Market wisdom says that promoter buying shares is a much more powerful signal than promoter selling stake, but stake plus cautious commentary makes for a deadly cocktail. Morgan Stanley sees revenue growth staying weak for the next couple of quarters. Unless market is willing to look past this and take a longer term view, the stock is now at risk of testing or even breaching the lows seen in March this year.

Cummins India

No screaming buy calls on this stock, but it continues to make new highs steadily. Fourth-quarter revenues and net profit were down sequentially, but the market appears to be taking a longer view here. Or, maybe, it is willing to a pay a premium for stocks where the earnings visibility is better than that for other sectors.

Earlier this year, Cummins MD Aswath Ram had said that prices of generators in India will rise by 50 percent at least as new emission norms later this year will affect the core technology. The run-up in the stock price

could be in anticipation of a sudden demand for gensets just before the new norms take effect. Nomura has a 'neutral' rating on the stock and Macquarie an 'outperform', but both brokerages have flagged volatility around the implementation of the new emission norms as one of the key overhangs for the stock.

Info Edge

With Friday’s 8 percent jump, the stock has now gained nearly 30 percent from the lows seen in March. The excitement may appear to be overdone, considering that the company itself is a bit cautious on IT hiring this year. On the positive side, non-IT hiring was robust during the March quarter. The bullish case for the stock could be that non-IT hirings should more than make up for any sluggishness in IT hiring.

According to Nomura, the strong performance during the second half of last year was driven by higher billing rates; this year the company expects growth to be volume-driven.

In slow lane

At the start of the year, investors were betting on strong demand from the reopening of the Chinese economy to be the saviour for the global economy. But it now seems China could do with a helpline itself. Profits at China’s industrial firms dropped 21 percent in the first four months of 2023, according to data from the National Bureau of Statistics (NBS), as companies struggle with margin pressures and soft demand amid a faltering economic recovery.

It is a double whammy for these companies as they face both weak demand at home and softening demand in major export markets. Wholesale prices for April fell at the fastest rate in three years.

Short copper

Hedge funds have turned net short on copper, the first time since June 2020, as the recovery in China’s economy is not playing out as expected. And chances are that technical factors could aggravate the downtrend in copper prices.

From Bloomberg.com:

“Much of the shift is likely due to trend-following trading programs repositioning as prices have moved lower, according to TD Securities, whose trend-follower tracker now suggests that substantially more selling may occur if prices dropped below $7,700.”

Negative gas price?

In April 2020, crude oil prices turned negative, stunning markets and the oil industry alike. Some people are now talking about the possibility of Europe seeing a brief dip to below zero for day-ahead natural prices in some markets this summer, according to a report by website oilprice.com. European benchmark natural gas prices have fallen for eight consecutive weeks as the result of a combination of mild winter, steady imports of LNG, and weak demand.

Trash is cash

Shares of the biggest players in the US trash business, Waste Management and Republic Services are in demand with investors on Wall Street looking to ride the sustainability boom, reports Wall Street Journal.

Why?

Efforts to reduce greenhouse-gas emissions and to reuse materials are making it more profitable to mine landfills for energy and sift through refuse for the hot commodities of the green economy, such as detergent bottles and cardboard boxes. Landfill owners are forecasting hundreds of millions of dollars in additional profit from rising demand for recycled materials and tax incentives for making energy from emissions that would otherwise seep into the atmosphere.