With the upcoming Lok Sabha election 2019, stock market seems to be in a cautious mood since the start of the year, with Sensex and Nifty falling nearly 1% each in the last two months.
With the upcoming Lok Sabha election 2019, stock market seems to be in a cautious mood since the start of the year, with Sensex and Nifty falling nearly 1% each in the last two months. While several investors are waiting on sidelines for election before making more moves in the stock market, PMS manager Yogesh Nagaonkar advises to use the opportunity of low valuations and take positions in strong companies. Further, he advises a ‘safety-first approach’ to investment decisions. “It is vital to create a diversified portfolio of stocks, not just concentrate your bets in 2-3 stocks,” he explains.
Yogesh Nagaonkar, founder and CEO of Rowan Capital Advisors, a SEBI registered portfolio management services firm, shares his 5-point winning formula for identifying long term investment bets. In an interview with Shaleen Agrawal and Sushruth Sunder of Financial Express Online, Yogesh Nagaonkar also shares his top large-cap, mid-cap and small-cap stock bets.
Here are the edited excerpts:
The stock market continues to remain choppy, with the Sensex recording its biggest losing streak in the last six years. What are the factors behind this fall?
At the start of 2018, most of the stocks in the small and midcap segment were overvalued with Nifty Midcap-100 trading at P/E of 91 and Nifty Mid-Small cap index trading at 80 P/E. Also, the Nifty was trading at 26 times P/E on 1-year forward earnings. So the correction was inevitable. We feel that many events that played on the corporate world and political arena viz the liquidity crisis and subsequent crack in the NBFC space, BJP losing the assembly election in big states like MP, Rajasthan and Chhattisgarh front and the higher valuation served a perfect recipe for correction. Also, slow auto sales and bleak consumer confidence suggested a lull in the economy. Most investors are waiting for 2019 Lok Sabha elections for clarity on which party will form the next government or will there be a hung parliament, before they start investing in the market.
Ahead of Lok Sabha election 2019, should investors enter the stock market or stay on the sidelines? Is there an opportunity in the market amid the ongoing cautious mood? How?
Basically there is an opportunity in the market especially in the small and midcap space and selectively in large-cap space. Most small and midcap stocks have corrected 50-60% and now the valuations are attractive, the P/E Nifty Midcap-100 has fallen from a high of 91 to now 40 and P/E of Mid-small cap 400 index has fallen from a high of 80 to 37. We feel investors should start investing in small and mid-cap companies but strictly investing only in companies which satisfy the following conditions; 1. Good Quality management with a high level of corporate governance; 2. Zero debt companies; 3. Companies generating Free cash flow and paying regular dividends; 4. Companies with high promoter stakeholding, and; 5. Ability to grow bottom-line at a 15% CAGR for the next 3 years. In the large-cap space there are 2-3 good bargains and are valued attractively due to the caution and fear prevailing in the market which makes for good buying opportunities.
However, one does not know which way the election will go, so there has to be a strategy to follow while investing in this market. So one must allocate 30% of the capital at current levels, divide the allocation evenly among 15 stocks, and allocate 30% more in the same portfolio of these 15 stocks just before the election. So eventually one will end up investing 60% of investible portfolio before the election. Investors can invest the remaining 40% post elections once there is clarity on the political front.
Which stocks should investors look to buy to tide over the ongoing volatility in the stock market?
As mentioned above companies which have proven track record and satisfies the conditions mentioned above are good buying candidate, also companies whose valuation has become attractive are another set of the basket where one can search for bargain options for eg: some of the Auto Ancillary companies are trading below 10 P/E. So companies satisfying both the above conditions are good buys.
In the mid and small cap space, one can look at companies such as Automotive Axles, Jamna Auto, Redington India, DCB bank; and in the mid to large space one can look at companies such as Whirlpool, Berger Paints, United Breweries, Balkrishna Industries. In the large-cap space one can look at beaten-down stocks like Yes bank, Sun Pharma, Emami and some quality stuff like Kotak Mahindra Bank, TCS, L&T.
What is your assessment of the Q3 earnings? Which sectors are likely to report strong earnings growth going forward?
The Q3 earnings were not that impressive; apart from IT most sectors have displayed dismayed set of numbers including Automobile, FMCG and consumer staples. We expect the rupee to continue to depreciate further and hence we expect IT to do well. Also post-election we expect the consumption to pick up and expect FMCG and Banking will start posting some good numbers.
(Yogesh Nagaonkar is the founder and CEO of Rowan Capital Advisors, a SEBI registered portfolio management services firm. Views expressed are his own. Please consult your financial advisor before making any investment related decisions)