Mutual Fund (MF) managers preferred to increase their stake in small and midcap companies for the quarter ended June. There are over 80 companies in which fund managers raised their stake, as seen from data collated on 16 July from AceEquity.
Of the 80 companies, there are as many as 19 companies which rose 10-50 percent so far in 2019 which includes names like LIC Housing Finance, HDFC Bank, HDFC Ltd, NMDC, Axis Bank, Brigade Enterprises, KNR Construction, P&G Health, Godrej Properties, and Hester Biosciences Ltd among others.
Fund managers were also quick to spot companies which have plunged by double digits with some falling up to 60 percent so far in 2019. There are more than 30 companies in which fund managers raised their stake in the June quarter, which fell 10-60 percent.
Stocks which fell in double digits include names like Central Bank of India, Sterling Tools, MM Forging, Cadila Healthcare, Ajanta Pharma, Natco Pharma, Sun TV, Coffee Day, L&T Finance Holdings, Biocon, BHEL, and Mahindra Logistics among others.
The next big question is – are these stocks looking attractive? Well, for long term investments, investors should use the list as a reference point and do their own research when putting money in any stock or exiting any position.
“Long term investments in listed equities should not be made primarily on the decision that stakes are being raised by MFs in the target stock. They should be made looking at the historical track record of underlying fundamentals of the company i.e. growth of the income statement, the solidity of the balance sheet and the stickiness of its cash flows,” Rajesh Cheruvu, CIO at Validus Wealth told Moneycontrol.
“Simultaneously, the future prospects of the company, as well as its sector should be understood clearly before investing. Finally, having gotten a grip of past and expected fundamentals – valuations are the final check for an investor as (s)he needs to pay the right price for getting a stake in the company,” he said.
Of the 80 companies in which fund managers reduced have their stake, as many as 22 fell 20-60 percent so far in 2019. These include names like MMTC, PTC India, ENIL, eClerx, Titagarh Wagons, IDBI Bank, and Jain Irrigation Systems among others.
Most of the companies belong to the automotive and the chemicals space, which are largely weighed down by global growth concerns. Can we say that it is a sign of caution? Well, to a certain extent, yes, suggest experts.
Although investors should give sufficient time to their investments to grow and give results, any minor tweaks in the MF holding or FIIs holding should be ignored. But, if there is a fundamental or a structural reason, then investors should note of that immediately.
“It is, of course, a sign of caution as the parameters of fund managers/institutions are very broad. If a stock is slipping out of these parameters, it is a sign of caution at least initially that any one of the parameters is not fulfilled,” Mustafa Nadeem CEO Epic Research told Moneycontrol.
“It can be management vision, Business growth, earnings, and forward earnings. Performance of the past few years and so on. So yes one should be cautious in these stocks,” he said.
Others parameters to track:
A MF's list of investments is one filter which can be used to shortlist stocks, but there are multiple filters/parameters to screen out stocks. One can be fund holdings, or management vision and even forward guidance, suggest experts.
“Fundamental track record in terms of the top line, operating and bottom-line growth along with margins – both on the long term as well as shorter-term, quarterly basis need to be looked at for any stock whether it is a part of an MF list or not,” Cheruvu of Validus Wealth said.
“Balance sheet robustness in the form of credit, liquidity and solvency ratios and finally free cash flow growth are the norms of the day. In recent times, changes in pledged shares could also be scrutinized,” he added.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.