Bottom-up investing is an investment approach in which an investor should focus her attention from the industry to specific stocks.
The Nifty hit a fresh record high in the morning trade on Tuesday, supported by positive global cues. The action was equally strong in the midcap space. The Nifty free float midcap index rose to a fresh high of 18,021.10, while the S&P BSE midcap index rose to a fresh record high to 14,723.94 in morning trade.
The small and mid cap stocks stood out in terms of returns delivered when compared to large cap
There is tremendous potential in the mid and smallcap space and is not limited to just 100 names mentioned in the midcap index.
The midcap and small cap index are overvalued but there are few stocks within the space which are trading at decent valuations; hence, investors should focus on cherry picking.
“I think this bottom-up stock picking will continue in the midcap space. When you are in a bull market, you would have individual stocks and areas where you would find short term pockets of excesses and bubble,” Sanjay Dutt, Director at Quantum Securities
said in an interview with CNBC-TV18.
“Both fund managers as well as smart money, the private client group is looking for opportunities. Retail continues to be hesitant at the first correction, at the first pause, they tend to run and book profits, but they are also getting confidence slowly,” he said.
Midcaps have been the segment leaders in the ongoing bull run, which is evident from the fact that they have outperformed consistently compared to large caps even on corrections. The S&P BSE midcap index is up over 20 percent compared to 12 percent gain in the S&P BSE Sensex.
A huge gush of domestic as well as global liquidity has flushed the mid and smallcap space. The possibility of a correction looms, but that should not deter investors to make fresh purchases on dips.
“Most of the midcaps are overvalued and in times of volatility, they could fall more and deteriorate the value. However, midcap space is huge and it is not limited to only 100 names present in the midcap index,” Tushar Pendharkar, Head of Research, Right Horizons Investment Advisory Services told Moneycontrol.com.
“I would suggest investors to purely follow Bottom-Up approach to select mid and small cap names. I would recommend to stick to fundamentals and create a rigorous filter while selecting names from this universe,” he said.
Going by the buzz on D-Street, we have collated a list of top five stocks which investors can look at on declines:
Analyst: Foram Parekh, Research analyst, Bonanza Portfolio
We believe that Trident’s shift in product mix towards high margin value added products, addition in clientele, entry into new export markets, improvement in return ratios and robust free cash flow generation will be the key positives for the stock to give at least 20 percent returns.
With our relative valuation method, the stock is currently trading at mere 18x FY19E at an EPS of Rs 5.7 to reach a target price of Rs 102 which translates into an upside of 21 percent.
Talwalkars over the years has graduated from core gym-based fitness to a more holistic understanding of what a modern-day fitness stands for — specialised nutrition, personalized attention, and fitness bordering on lifestyle.
Talwalkars expects to emerge as the number one player in 10-12 leading Indian cities while retaining its dominance presence in Sri Lanka. On the valuation front, the stock is cheaply undervalued compared to its peers at mere 12x FY19E EPS of Rs 31 to reach a target price of Rs 375 which translates into a potential upside of 37 percent.
Analyst: Tushar Pendharkar, Head of Research, Right Horizons Investment Advisory Services
Apollo Tyres is the only name in Indian tyre sector which significantly diversified its products and geographies during past 5 years. However, few things went wrong with the company such as high debt on balance sheet during 2012-14, unsuccessful acquisition attempt of Cooper Tires and sale of Dunlop brand in South Africa, which badly impacted company’s image and valuation.
Currently this stock is trading at TTM P/E of 10-11x, while the peer group companies such as MRF (TTM P/E 17.4x), TVS Srichakra (TTM P/E 16.7x), Balkrishna Industries (TTM P/E 18.6x) and Ceat (TTM P/E 15.2x) are trading at very high valuation and it is unlikely that they will come down, due to cooling rubber prices and higher installed base of vehicles for replacement.
JK Tyre is the only company which is trading at 7.6x TTM P/E; however, it has huge debt burden (total debt to equity of 2.8x). Apollo is improving its overseas business by focusing more on Europe & South East Asia and planning to raise overseas revenue contribution to 45-50 percent from current 35-40 percent.
Huhtamaki PPL is in flexible packaging business and derives over 95 percent sales from FMCG industry. FMCG is on the cusp of breakout with improving consumer demand, higher rural income, normal monsoon and cooling inflation.
I would suggest buying Huhtamaki PPL (market leader) rather than any FMCG stock which is facing fragmented competition. With the market leadership, reputed clientele (most of the FMCG players) and innovative offerings, Huhtamaki PPL is well placed to capitalize on available opportunities.
Acquisition of Positive Packaging (in 2014) enabled the company to enhance business and better economies of scale. The stock is currently trading at TTM P/E of 22.2x and EV/EBITDA of 8.8x, which is not expensive.
Analyst: Pushkaraj Sham Kanitkar, AVP – Technical Research at GEPL Capital
After hitting a fresh 52-week as well as a 5-year high, the prices have sustained on the back of very high volumes (36 L in first 2 hours against an average of 36 L for 25 days average).
In the intermediate, the stock corrected from Rs 172 to Rs 144 in the first 3-months of the calendar year 2017 that has been met with a much faster retracement to the high in a matter of 1 month.
On the weekly charts, there has been a good consolidation over a 5-year horizon, which indicates a start of a fresh leg of an up move.
A breakout above this indicates a move out of consolidation and may see a stellar move till Rs 191. The stop loss for the trade may be placed at Rs 161 on a closing basis, indicating the negation of the up-move.
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