India’s most wanted stocks

These are trying times for equity fund managers. Stock markets are gripped by uncer tainty as corporates churn out dismal numbers amid global worries. Unlike a year back, picking the right stock has become a tricky proposition. Should the portfolio be built around businesses that are most aligned to a recovery in the economy, or should the thrust be on quality, stable businesses that can hold their own in a prolonged slowdown?

Using a mix of qualitative and quantitative parameters, we identified 10 stocks from the BSE 500 universe in which funds had consistently increased their holdings during the previous four quarters. The rise indicates that these stocks have continued to find favour among fund managers in a changing market environment.

These were the favourites of MFs in the past year. Here’s why you too should buy them

We avoided outliers by limiting the study to stocks that are held by at least 20 equity funds. Similarly, we have limited the search to stocks in which the combined mutual fund holding is at least 5% of the total equity of the company . This ensured that mutual funds have a reasonable exposure to the stock. Of the 450-odd stocks for which shareholding data was available, only 38 stocks met all these criteria.

This list was pruned further by including only those stocks with a return on equity (RoE) averaging more than 15% for the past three financial years and a current PE of less than 20. This threw up nine names. We further looked at analysts’ recommendations to identify the most promising stocks from this basket. The result is a curated list of seven most wanted stocks in the market today .stock-market

Some could say mutual funds may have bought these stocks when they were priced attractively and buying them now may not yield high returns.We agree, and this is why we have placed a cap of 20 on the PE. Richly valued stocks won’t make the cut.

Before investing in these scrips, keep in mind that the funds have likely invested in them with a long-term perspective. If you are looking at these stocks as a surefire way to make money in the next 3-6 months, you might be disappointed. Mutual fund managers constantly track the stocks they invest in and regularly review their portfolios.If the fundamentals of a stock have changed, their outlook for the stock may also change. So, investors will have to monitor their investments closely and act quickly if required. These most wanted stocks should find a place in the portfolio of the patient equity investor who is looking for quality scrips at reasonable prices.

How the stars of 2014 have fared

Stocks that were the most wanted a year ago saw a healthy jump in prices until March-April this year. While some have since lost ground, a couple have yielded negative returns.

The best performer, Gateway Distriparks, saw shares climb 73% by March this year. They have since cooled off a bit as valuations got stretched in relation to earnings. Both Vinati Organics and Shriram Transport Finance have seen smart initial gains get eroded in the past few months.

Meanwhile, after some initial weakness, Atul’s shares have climbed up smartly since June this year, owing to improvement in operating margins and perceived benefits. Finolex Industries, which also saw a slight dip initially as lower PVC prices hit profitability, has recently recovered lost ground. Exide Industries, which surged 22% by January , has since pared those gains as automotive OEM and industrial battery demand has remain subdued.

KPIT Technologies’ shares had surged 39% to `219 by March this year, but fell off the cliff after dismal March quarter results, impacted by macroeconomic circumstances. Rumours of a stake sale by its promoters took KPIT shares to a multi-year low of `85 in June. The shares have recovered recently on healthier numbers in the September quarter.

The share that has taken the biggest hit is McLeod Russel. This is in line with other tea companies’ shares which have fallen more than the broader indices, in the wake of declining tea production in India due to weak monsoons.

Should investors hold on to these stocks? You should give your investments at least 2-3 years before you take a call. All eight most wanted stocks in 2014 are worth holding for the long term. They won’t go into a tailspin if the markets turn bearish.

Source: TOI 17 Nov;2015