Despite big fall, most fundamentally strong stocks still remain expensive

If you thought that you could buy your favourite stocks after the carnage on Friday wherein Nifty Midcap and Nifty Smallcap had tanked 4 per cent and 6 per cent, respectively, on a single trading session, then here is the bad news. Most stocks, which lost the most on Black Friday, have not been among analysts’ top picks. So, investors have no choice but to keep a long-term view and buy the good stocks or future likely outperformers at expensive valuation.

Despite high valuation, mid- and small-cap indices made a fabulous u-turn on Monday after falling further by 3-3.5 per cent intraday. While Nifty Midcap closed down a marginal 0.2 per cent, Nifty Smallcap ended up 0.8 per cent.

Stocks from sectors such as information technology and pharmaceuticals were stable on Black Friday but that is because they have underperformed the peer indices for a long time and hence, saw value buying. Stocks such as Tech Mahindra, HCL Technologies, TCS, GlaxoSmithKline Pharmaceuticals, Torrent Pharmaceuticals, Glenmark Pharmaceuticals, Narayana Hrudayalaya, Sanofi India, Syngene International and Persistent Systems gained in the range of 0.05-1.4 per cent on Friday.

Stocks such as ITC which were not favoured due to concerns over tax on cigarettes also saw relief rally. Stocks such as HUL and Coromandel International gained on the government’s measures to boost the rural economy and/or agriculture sector. Other gainers were Bank of Baroda, Info Edge, Max Financial Services, Finolex Industries and Gujarat Gas. While Info Edge jumped 3.2 per cent, others gained in the range of 0.5-1 per cent. JM Financial and Antique Stock Broking have ‘buy’ recommendations on Info Edge and Gujarat Gas, respectively.

While IT stocks are back in favour due to improved macro outlook and most are recommended as top buys, the same is not the case with pharma or healthcare stocks. Analysts being selective in pharma space and none of the above stocks except Narayana are in the buy list. Losers were plenty on Friday and directly proportional to the universe/nature of indices. For example, while only 10 per cent from Nifty 50 (large caps) closed in positive zone, it was only 1 per cent in case of Nifty Smallcap. An interesting point to note here is that only losers got dumped. In other words, stocks which got dumped, are either not exciting companies or they are not from good sectors.

Given the budgetary support to boost the rural economy and agriculture sector, stocks such as Bajaj Auto and UltraTech Cement can be good bargain picks. These stocks have gained in the range of 12-15 per cent in last one year after the fall of 5 per cent each seen on Friday.

Increase in import duty on tyres have made tyre stocks attractive. Ceat which tanked 13 per cent on Friday can be looked at along with Apollo Tyres and MRF. Companies such as Bharat Electronics, and BEML look attractive after the fall as they will gain from government expenditure on defence, railways and infrastructure.

Analysts’ favourites

Though stocks such as PC Jeweller, Bajaj Finance, Dewan Housing, Indiabulls Housing Finance, Maruti Suzuki, Jet Airways, GMR Infrastructure and Reliance Industries look expensive even after the fall of up to 25 per cent on Friday, given the one-year gains of 46-94 cent, they are analysts’ favourite stocks, either due to relatively cheap valuation compared to their peers or due to good business prospects.

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