It’s that time of the year again when you look back to see how the year was and plan for the New Year. By now it’s a foregone conclusion that December is going to be a “darling” month for the equity markets, but the question of what next is going to persist. Even if foreign direct investment in retail gets the Parliament’s approval, India’s macro economic situation will not dramatically improve nor will growth. So then what can you do as an investor?
No doubt, all boats tend to rise in high tide, but if investors don’t want to be stuck in such a boat then they will need courage to break out of the herd. The second quarter has thrown up many beats (companies that have beaten consensus estimates on earnings) and misses (those that have missed estimates). Morgan Stanley says the earnings surprise breadth improved quarter-on-quarter to 48 per cent, although the performance beat fell to 44 per cent.
What this means is that while earnings of more companies surprised positively this quarter, overall performance was slightly below expectations. The good part is that there were more positive surprises than expected.
And the market has not fully woken up to this opportunity. At the sector level, companies in the healthcare and technology saw maximum beats while telecoms and energy saw the only misses.
Investors who want to play the contrarian call need to look for companies where earnings upgrades have happened after the second quarter earnings and yet their stock prices have not moved up. The positive surprise in terms of earnings has come from TCS and State Bank of India, while ONGC, Tata Steel and Bharti have thrown up negative surprise. There are several companies like ITC, Hindustan Unilever, Dabur, Reliance Industries, Infosys, TCS and Wipro which have seen upgrades but their stock prices have not moved in tandem and so are buy opportunities. Apart from this, there is another play that investors can look at. For instance, stock prices soar when institutional ownership increases. In recent times, FII ownership in stocks like PowerGrid, Mahindra & Mahindra and Tech Mahindra has moved up sharply in the third quarter of calendar year, which has also pushed up share prices. However, there are several good stocks where FII ownership is not yet very high and can be considered. BNP Paribas recommends this stock strategy and says: “Notable under-owned stocks that we are fundamentally positive on are Wipro, Persistent, Dr Reddy’s, Oberoi Realty, IndusInd Bank and Idea Cellular. Similarly, notable over-owned stocks that we are fundamentally cautious on are Hero Motocorp, BHEL, GMR Infra, HCL Tech, DLF, and Bank of Baroda.” It takes a lot of break out of the herd mentality, but those who do are the winners.