Low beta stocks (Beta less than 1) fall less than the market when it is on a downward spiral, and are thus known as defensive stocks. These also remain immune to business cycles.
What stocks should you bet on in a market that is likely to move downwards? Defensives, of course. These are stocks with low beta and those likely to remain immune from adverse business cycles.
Some sections of equity analysts believe that Indian stock market may head downwards from here. This after the first two months of 2016 have already jolted investors sentiments as the benchmark BSE Sensex nosedived 12 per cent till February 29.
However, some recovery was seen in March on firm global markets and inflows from foreign institutional investors. The 30-share index advanced 7 per cent on a month-to-date basis till March 17. FIIs bought shares worth of Rs 10,227.16 crore (net) in March so far.
Despite the recent rally, research firms such as Credit Suisse and Nomura are downbeat on India. Credit Suisse has downgraded Indian shares to ‘underweight’ from ‘overweight’. According to Nomura, India’s growth momentum, which had turned positive in 2015, is showing signs of tapering off in 2016. Their views indicate some uncertainty for domestic equity markets going forward.
If their forecast come true, low beta stocks can help you to protect your portfolio. Beta indicates correlation with the market movement. Low beta stocks (Beta less than 1) fall less than the market when it is on a downward spiral, and are thus known as defensive stocks. Also such as stock is associated with companies that belongs to an industry or market sector that is unaffected by business cycles. This includes consumer services, consumer packaged goods (FMCG), healthcare, defense etc. Beta measures the sensitivity of a stock return with market return.
Dhruv Desai, director and COO, Tradebulls, said, “During economic recessions, or market downturns, investors should add defensive stocks to their portfolios. The best time to buy defensive stocks is just before the economy enters a downturn. They can provide investors with a safety net during turbulent times. Once a market is firmly entrenched in a bear market, it’s often too late to invest in a defensive stock.”
On the other hand, Vikas Gupta, executive vice president and chief investment officer, – ArthVeda Capital, said, “The returns from these are not likely to be high since one is paying a premium as these companies are available in the markets at a price higher than their intrinsic value.”
Below are 5 defensive stocks on which market experts are bullish at present:
Recommended: ArthVeda Capital
Market Price (as on March 17): Rs 538.25
Investment Rationale: The IT major is a cash-rich company (low leverage), with nearly 13 per cent of the market cap comprising of cash balance. Available at attractive EBIT yield of 10 per cent of which 2 per cent is dividend yield. The stock stands to gain from exposure to US economy and a weakening Indian currency. The company has a portfolio of IT services for a gamut of multinational clients, all of which translates to a solid top-line and robust fundamentals. Shares of Wipro are available at attractive valuations and offers a good entry point to investors.
Recommended: ArthVeda Capital
Market Price (as on March 17): Rs 489.05
Investment Rational: Strong profitability (operating margins in high teens) and net cash position for the company leads to robust quality for Mphasis. Potential gains from US and a weak Indian rupee should bolster the company. Optional value from cash of Rs 1,320 crore for organic and inorganic growth. Earnings yield (on EV basis) of 11 per cent further justifies a good entry point.
Market Price (as on March 17): Rs 940.75
Investment Rationale: Emami is one of the largest players in the domestic FMCG market with a strong presence in the underpenetrated categories such as cooling oil, antiseptic cream, balm and men’s fairness cream (it enjoys more than a 60 per cent market share in each category). It is banking on “Zandu” to gain large pie in the ayurvedic healthcare market, which has been gaining strong traction (especially in the urban markets) in the recent years. The “Zandu” range of healthcare products has grown strongly at a CAGR of 26 per cent over the past five years. The desire to become a large FMCG player by riding on a portfolio of differentiated brands and improving reach in various geographies will help Emami to achieve above 17 per cent CAGR earnings growth over the next two to three years. This makes Emami one of the better plays in the mid-cap FMCG space. The stock is currently trading at 27x FY2018E adjusted earnings. Sharekhan initiated coverage on the stock with a ‘Buy’ rating with a price target of Rs 1,250.
Recommended By: JM Financial
Market Price (as on March 17): Rs 252.50
Investment Rationale: The share price of Gateway Distriparks slid 40 per cent in the past one year till March 15, 2016. For the quarter ended December 2015, the company reported a consolidated net profit of Rs 30.93 crore, down 43.08 per cent, against Rs 54.35 crore in the corresponding quarter a year ago. JM Financial initiated coverage on Gateway Distriparks with ‘Buy’ rating with March 2017 target price of Rs 340. The brokerage house believes the recent drop in share price adequately captures the weakness in macro environment and earnings momentum. Gateway Distriparks is well placed to benefit over the long term from pick-up in domestic growth.
Recommended By: Motilal Oswal
Market Price (as on March 17): Rs 324
Investment Rationale: In the Union Budget 2016, the government hiked cigarette excise duties by 10 per cent, fifth consecutive year of a double-digit hike but lowest in last five years. The rise was lower than expected 15 per cent. With budget overhang behind, combination of muted expectations and attractive valuations makes risk-reward favourable for ITC. Motilal Oswal upgraded ITC to ‘Buy’ with a revised target price of Rs 365.