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Scouting for ideas in a volatile market? Are you hunting for stocks which are available at a reasonable valuation compared to the historical averages? You are not alone in this hunt.
The market is down by about 5 percent from its respective record high and is trading in a range without any clear direction of the trend, but a majority of the individual stocks listed on the exchange have seen a double-digit beating in 2019.
At a time when there is ‘fear’ in the market has gripped investors taking investment call becomes slightly challenging. The government, in the last one month, has introduced a host of measures to revive demand and boost consumption in Asia’s third-largest economy – but the latest micro and macro data suggest otherwise.
One of the measures in which we can shortlist stocks is to look at companies which are trading below or above their industry PE. However, this alone should not be considered in selecting stocks, but it could be one of the criteria to shortlist.
“Industry PE is definitely one of the key aspects to look at as it provides an average comparative multiple for any company within the sector. However, any stock trading below/above should not be conceived as undervalued or overvalued as there could be other reasons as well that could lead to premium or discounts,” Ajit Mishra, Vice President Research, Religare Broking, told Moneycontrol.
“Some of the fundamental reasons that could lead to deviation would be the size of the company, market share, debt levels, corporate governance, and financial track record. Hence, it would not be prudent to judge valuations only on the basis of industry PE,” he said.
Theoretically, investors should avoid looking at stocks which are trading above their Industry PE, and buy if it is trading below industry PE, but experts feel that there are potential long term ideas that can be explored under both the themes.
There are as many as 381 stocks with a market cap of more than Rs 500 crore that are trading above their respective industry PE. These include names like TCS, RIL, HDFC Ltd, ITC, Infosys, SBI, Bajaj Finance, Coal India, NTPC, among others, according to data collated from AceEquity.
The opportunity for profitable investing lies on both sides of the average. “Specific companies that would be exhibiting improved fundamentals in terms of improving return ratios like ROE and ROCE and higher free cash flows will continue to attract capital,” Shailendra Kumar, Chief Investment Officer Narnolia Financial Advisors, told Moneycontrol.
“We prefer quality stocks with improving fundamentals in credit as well as consumption opportunities. Specifically, we like ICICI Bank, Titan and Avenue Supermart among the companies trading at premium TTM multiple than its long term average. Among companies trading at lower TTM multiple than long term averages, we like HDFC Bank, ICICI Lombard, and Marico,” he said.
Note: Top 30 stocks that are trading above industry PE based on M-cap
There are more than 500 stocks that are trading below their respective industry PE. These include HDFC Bank, ONGC, IOC, Wipro, HCL Technologies, Bajaj Auto, Bandhan Bank, BPCL, Tech Mahindra among others, according to data collated from AceEquity.
It is a general perception that if the stock’s PE is lesser than the industry average, it is undervalued. While it is true to a certain extent, looking at PE in isolation is not the right way to make a buy or sell decision, suggest experts.
“Buying quality stocks at lower valuations could be a good idea to generate lucrative returns in the long run if the stock has sufficient growth potential going forward. Further, the discount to industry average has to be substantial (at least over 15 percent) and should be occurring on a sustainable basis so as to enable the stock to be termed as an undervalued stock,” said Mishra.
He further added that amongst the above-mentioned list of stocks, the discount gap between HDFC Bank, Bajaj Auto and Siemens as against their respective industry is quite narrow. However, other marquee names such as ONGC, HCL Tech, IOC and Tech Mahindra can prove to be good bargains at current levels, if there is a reversal in sentiments and further corroborated by support from the earnings.
Note: Top 30 stocks that are trading below industry PE based on M-cap
Disclaimer: The views and investment tips expressed by investment experts 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.