After hitting an all-time high, the market is going through a phase of consolidation and in such a situation, analysts at Kotak Institutional Securities believe, one should be clever in stock picking and rotate from potential losers to potential winners.
The analysts believe that the Indian stock market is in a phase of bears, bulls and bubbles – all at the same time. Several largecaps are in a bear market, a section of midcaps and smallcaps are in a bull market, while another section is full of froth.
“We find much better value in the top largecap stocks – most of the top 15-20 stocks by market cap – and expect them to outperform in the next 6-12 months, as the current euphoria in other largecap, midcap and smallcap stocks may fade over time and their valuations realign with their fundamentals,” said Sanjeev Prasad, managing director and co-head at Kotak Institutional Equities, said in a note on October 9.
As per data analysed by him and his team, five out of the top six stocks with a weight of 34 percent in the Nifty 50 index have delivered negative returns over the past two years, while 22 stocks with a weight of 55 percent in the Nifty 50 index have given less than 10 percent returns in the same period.
Such a scenario makes it favourable for value investors to fish such stocks when they are down, Prasad suggests. On the other hand, it is better to exit segments that have seen euphoria while they are still in green.
“We do not find much value in most of our midcap and smallcap coverage universe of 150 stocks, given that most stocks are trading well above or near our 12-month fair values of the stocks,” Prasad argued. “The better-quality stocks may see time correction, while plenty of lower-quality midcap and smallcap stocks could see large price or lengthy period of time correction.”
Also read: What to expect from IT sector’s Q2 earnings
Stock picks
Prasad made a few changes in his recommended portfolio. He included Colgate Palmolive and Cummins India in the portfolio, with a weight of 150 bps each and reduced positions in Axis Bank by 35 bps to 7.2 percent, Mahindra & Mahindra by 40 bps to 2 percent and Titan by 60 bps to 1.5 percent. He completely exited Samvardhana Motherson.
“The stock has delivered a 37 percent return in the past six months and offers moderate upside to our 12-month Fair Value of Rs 105. We continue to like the company’s fundamentals and long-term prospects, but we see near-term headwinds to global automobile volumes from global growth challenges,” he said.
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