In other words, market sentiment, whether pessimistic or optimistic, about future earnings holds most value for them. But events can at times bring in drastic changes in those sentiments and lead to mispricing, throwing up opportunities in the process.
“Long-term growth prospects as ‘perceived’ by the collective wisdom of investors (allegorized as Mr Market) are embedded in stock prices, which lead to major fluctuations in stock prices whenever those perceptions change,” said Vinod Karki and Siddharth Gupta, analysts at
.
“A change in perception regarding those long-term prospects due to short-term events provides maximum opportunities in investing. For example, the March 2020 market-wide selloff; Titan in 2015-16 and currently the second wave of Covid,” they pointed out.
The duo segmented top 200 stocks according to the market sentiment towards them, and came out with 19 names that they said can be bought to either ride the sentiment or exploit the aberrations.
For example, the analysts found 18 stocks whose current stock prices reflect market expectation of negative or near-zero growth beyond FY23 consensus earnings into perpetuity. These stocks are largely PSUs engaged in sectors like utilities, oil & gas and financials with a large number of them scoring low ESG scores.
Analysts believe the market’s assumption of negative growth into perpetuity appears too pessimistic for some of these stocks and, hence, recommend buying NTPC and GAIL from among them.
Similarly, the market seems to have very low expectations from 18 stocks from financials, metals and energy sectors, while in reality they look poised to improve earnings growth. ICICI Securities recommend buying SBI, Federal Bank and BPCL from that bracket.
Pessimism or optimism in the market about the long-term growth prospects of a stock could be both overstated or understated, and does not guarantee investment success. This ‘irrationality’ also leads to buying or selling opportunities.
ETMarkets.comBelow are other ‘sentiment brackets’ and ‘buy’ recommendations from the analysts:
- Low to moderate expectations
32 stocks majorly from the auto, financials, healthcare, IT and a mix of other sectors fall in this bracket. Median earnings growth of this group is projected to be 13 per cent over FY20-23 and median RoE in FY23 is expected to be 16.5 per cent. Karki and Gupta suggest buying , Bandhan Bank, and Tata Motors from this basket, as they may provide growth at reasonable valuations.
- Moderate to high expectations
There are 55 stocks in this basket, majorly from cement, industrials, IT, auto, pharma and financials. Median earnings growth of this group is expected to be 18 per cent over FY20-23 and median RoE for FY23 17.7 per cent. They are mostly leaders in their respective sectors and have already seen massive growth in the past few years but the market still sees them growing rapidly, hence are available at a premium. The duo believes HDFC Bank, , HDFC, L&T, , and can be good buy options from this bracket.
Current market prices imply bulk of the value for this category will be derived from long-term earnings growth rather than the earnings trajectory till FY23. There are 68 stocks majorly from consumer, auto, financials, pharma, industrials and new-age sectors such as retail, digital, green energy in this segment.
“Buying should be restricted to high quality growth stocks (earnings CAGR > 15-20 per cent) in this segment involved in economic activities, which have high long-term growth visibility. Also, such stocks should be consistently beating or meeting estimates as valuation rerating is unlikely,” said Karki and Gupta, who recommended Tata Consumer Products, Divi’s Lab and SBI Life as their top picks.
