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Stocks with low valuation that can make for good picks

Though the benchmark indices are hitting new highs every other day, it is only a few, select sectors, such as IT, FMCG, pharma, telecom and private sector banks, which have buttressed the market sentiment. “While the Nifty is up by 5.6% from the highs of January 2008, almost 75% of the stocks are below these peaks,” says Vinod Sharma, business head, private broking and wealth management, HDFC Securities.

In fact, among the BSE-500 companies, a majority of the stocks is still close to their five-year lows. Would these make for good picks?

According to experts, investors need to be careful about picking stocks because most of them are quoting at lower levels for valid reasons. “There are specific issues related to the sectors or stocks,” says Harendra Kumar, managing director, Elara Securities. Pankaj Pandey, head of research, ICICI Direct, agrees: “The aviation sector, for example,should be avoided because it is yet to demonstrate a stable and clear profitability stream.” Besides, the macro headwinds are only getting stronger for the sector.

How the firms fared
Stocks with low valuation that can make for good picks
Stocks with low valuation that can make for good picks

From pricing issues and vacancy levels to capacity addition and fuel prices, nothing seems to be working in its favour. It’s the smaller players, such as SpiceJet, that have suffered the most, with its scrip tanking from Rs 97 three years ago to Rs 15 now.

This, however, does not mean that you should avoid stocks from all sectors facing multiple headwinds. For example, the power sector has its share of woes, but an economic revival may bolster its chances of a turnaround. Power companies are braving the heat of supply bottlenecks, such as delayed coal linkages and environmental clearance

Stocks with low valuation that can make for good picks
Stocks with low valuation that can make for good picks

“The reduction in power deficit is more because of the demand destruction from industries and not because of an increase in production,” says Pandey. However, once the economy is back on track and demand increases, the sector might be able to jump-start its way to recovery.

The hope of an economic revival is making financial experts bullish on power companies like NTPC and Reliance Power. “Most pessimism in NTPC has already been priced in,” says Kumar. So, investors could take advantage of the correction to get in. Similarly, Reliance Power is weighed down with very high debt build-up, but despite this, investors with very long holding periods should consider it. “Reliance Power is at the bottom, but will go up slowly,” says Kumar.

Cyclical trading patterns have also played a major role in the reversal of fortunes for certain sectors. For example, capital goods and infrastructure hogged the limelight during the 2007 rally, while IT, FMCG and pharma, which were on the sidelines, are doing well now. “Investors should not assume that the stocks that have not yet participated in the rally will not do so in the future,” says Sharma. However, you should be wary about overvaluation. Mahindra Holidays & Resorts is trading close to its five-year low, but its fundamentals are sound. “However, the company is still overvalued and `200 should be a good entry point,” says Kumar.

Stocks with low valuation that can make for good picks

Though there is no visible change in their economic fundamentals, the stocks from beaten-down sectors, including infrastructure, construction and public sector banks, have done well in the recent past on the expectations of a “business-friendly and stable government”.

However, these stocks may crash if we don’t get an election mandate along the expected lines. “You need to take a final call on the infra sector stocks only after the election results are out,” says Pandey. “Don’t run after stocks now. There will be enough opportunities later, as there are many events after the election results, such as the Cabinet formation, the annual budget, etc,” says Sharma.

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