Experts feel that the premium given to the stocks is justified, and will continue to dominate the space as they can be termed ‘safe bets’ in volatile times.
The Nifty50 has turned negative for the year 2019, and it is down more than 10 percent from its record high of 12,103 registered in the month of June. The big question is – what should investors do now?
The stocks which are trading at a discount to their long term averages continue to trade under pressure due to domestic and global headwinds while the stocks which are trading at a premium keep rising high.
Stocks which are trading above their 10-Year Average PE include names like UPL, Hindalco, Bajaj Finance, HUL, Titan Company, HUL, Sun Pharma, Infosys, Maruti Suzuki, HDFC Ltd, UltraTech Cements, Adani Ports, Wipro, etc. among others.
Long term moving averages define the price action of a security. A Price-to-Earnings ratio or PE value the company is a ratio of current market price to its earnings per share. It also referred to as a multiple. This measure of valuing the company is used by investors to filter out stocks for investment.
Note: Full list of stocks is available at the bottom of story
The thumb rule is that investors should reduce exposure in stocks which are trading at a premium to long term averages and vice-versa for those which are trading at discount.
However, looking at the current environment, experts feel that the premium given to the stocks is justified and these stocks will continue to dominate the space as they can be termed ‘safe bets’ in volatile times.
But, this does not mean they will not correct. They would fall less when compared with other stocks in the same timeframe. Some of the stocks have given negative returns in 2019 as well and are a good buy-on-dip bets.
The momentum plays are safe bets because they are consistent performers. They might not deliver a big alpha or higher returns but will hold steady especially at times when the market is going through a rough patch, a similar situation in which we are in right now.
“Good quality things come at a price. There is a reason why market pays a premium to them, because of their earnings, cash flows, leadership in their business domain, predictability makes them trade in that way. We believe rally should sustain in these kinds of stocks,” Pritam Deuskar, Fund Manager, Bonanza Portfolio Ltd told Moneycontrol.
Dinesh Rohira, CEO & Founder 5nance.com is of the view that most of these stated stocks are consumption-oriented.
“These stocks are trading at high valuations and there are some good reasons (like management quality) for this significant premium to historical averages. As for Reliance, Jio is emerging as their focus area. There is a fundamental change, thus the premium is justified,” he said.
Can we say that stocks which are trading at a premium are always good bets? Well, the answer is both Yes and a No for the short term.
It is a good trading bet especially at a time when there is fear in the market, and other companies are reeling under industry-specific headwinds. But, they might not be able to produce big returns in the long term.
And a No as well in case you are a long term investor. In that case, investors should focus on those stocks which are trading at a discount and should bounce back when the industry-specific factor improves or when the liquidity tides reverse.
“I would not suggest buying for long term any stock that is trading at a significant premium to their historical average. It works for momentum traders but not for investors,” Romesh Tiwari, Head of Research, CapitalAim told Moneycontrol.
“Even if the company is fundamentally strong and future looks optimistic the stock may not give handsome returns because the current price may have discounted all those factors. Investors should look at those stocks that are trading at attractive valuations due to disproportionate fear and FII selling,” he said.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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