Out of favour stocks deliver good returns over long-term, finds Motilal Oswal study; top contrarian stock bets

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Published: July 16, 2019 1:17:44 PM

While the Sensex's PE has reached alarming levels as investors continue to pour in money into the top 10 constituents, out of favour low PE stocks have delivered robust returns over the long-term, significantly beating the benchmark.

Sensex, Nifty slip, sensex highs, RBI monetary policy, sensex Selling pressure, Nifty, RBI, Monetary Policy Committee, Shaktikanta Das, rbi policy rate, Inflation, oilNeutral-to-moderately popular stocks have delivered a significant outperformance over long-term.

While the Sensex’s PE has reached alarming levels as investors continue to pour in money into the top 10 constituents, out of favour low PE stocks have delivered robust returns over the long-term, significantly beating the benchmark, according to a study. Motilal Oswal’s latest study said that neutral-to-moderately popular stocks have delivered a significant outperformance, even bettering the performance of the most popular stocks, over a long-term horizon. However, in the Apr-Jun quarter, the most popular stocks performed the best, beating the benchmark, whereas the neutral to moderately popular stocks delivered the third best return. “Our findings prove that, over the long term, out-of-favor low P/E stocks deliver disproportionate returns, significantly beating the benchmark. In 1QFY20, high P/E stocks performed the best, whereas low-P/E stocks came in second,” noted the study. 

According to investment advisor Jatin Khemani, the top 10 index constituents have been getting a lion’s share of incremental flows from both domestic as well as foreign funds, thus elevating their multiples, and even that of the Sensex. On one hand, few select large caps in key sectors like BFSI, IT and Oil & Gas which constitute majority of weightage in the index have been taking the markets higher, while the other sectors like Auto, Pharma, Metal and Telecom has already witnessed considerable correction over the past 1-2 years due to their respective challenges, Ajit Mishra, VP – Research, Religare Broking said in a note to Financial Express Online. 

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So, what strategy can investors follow to earn higher returns? “A simple strategy of investing in stocks for which analyst consensus has changed from ‘Net Sell to Net Buy’ with a holding period of one year has delivered 21.1% annual returns over the last 12 years,” Motilal Oswal noted. Further, nuetral to moderately popular stocks have performed the best over the horizon. Sharing its top strategies for investors, Motilal Oswal said that it’s Contrarian BUY include Bank of Baroda, Siemens, NTPC, NMDC and ITC. The firm’s Contrarian SELL stocks are Asian Paints, Havells, Britannia, Shree Cement and Cipla. “We highlight our top contrarian Buy and Sell picks based on the various themes we have covered in this note as well as in the past – Popularity, Relative Valuations, Net Sell to Net Buy, Consensus Sells,” said the firm. 

(Please consult your financial advisor before taking any investment related decision) 

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