Equity markets seem headed for volatile times. The economy is facing challenges in the form of rising oil prices, weakening currency and falling industrial growth. A recent finance ministry report also hints at a slowdown in the economy due to lower private consumption, weak growth in fixed investment and muted exports.
All these factors along with postelection ambiguity could contribute to increased market volatility in the coming months. The current developments are already spooking market participants as evident from the rising VIX or volatility index. The VIX hit 27.8 in the first week of May, a level last witnessed four years ago.
The best way to invest in such conditions is to look for stocks with good fundamentals and with moderate to low market risk. The market risk of a stock is measured using beta which defines how much of the stock return gets influenced by the index return. Stocks with beta value greater than one are considered more volatile as they tend to rise or fall faster than the general market index, on an average. In contrast, stocks whose beta values are less than one are considered less volatile as their intensity to rise or fall is less than that of the general market index, on an average.
We analysed 997 companies with a market cap of more than Rs Rs 500 crore. Their annual beta values with respect to the BSE Sensex were calculated for the period starting 24 April 2014 to 24 April 2015 and ending 24 April 2018 to 24 April 2019. Only those stocks were considered whose beta values were less than 0.7 in all of the five years under study. Moreover, the stocks were also evaluated on their standard deviation which is a measure of a total risk. Only stocks whose standard deviation declined by over 5% in the past one year,—May 2018-May 2019—relative to May 2017 to May 2018 were filtered out.
An additional filter was applied to look for stocks whose 12 months blended forward ROE as estimated by Bloomberg was greater than 12 months blended forward ROE of the BSE Sensex. Two additional filters were applied to look for stocks that were covered by at least five Bloomberg analysts and those with one year forward price potential greater than 10%.
Only nine stocks passed these filters comprehensively. The average point to point five-year return of these stocks between 6 May 2014 and 6 May 2019 was 134%, compared to BSE500 that delivered 80.2% during the same period. In terms of financials, the consolidated aggregate operating profit and adjusted EPS grew year on year by 11.9% and 15.8% respectively in the December 2018 quarter. Comparatively, aggregate operating profit and adjusted EPS of BSE500 index grew by 7.1% and 4.7% year on year during the same period.
Let us look at four of the nine stocks that have decent analysts’ recommendations and substantial one year forward price growth potential according to the Bloomberg consensus estimates:
- DB Corp
This media company publishes newspapers in 12 states, runs a radio business in seven states and has a digital presence with nine portals and four mobile apps. Analysts are bullish on the stock due to the market share gains, diversified readership base, recovery in ad revenue growth and stabilizing newsprint prices. Its diversification across geographies puts the company in a better position to withstand rising competition and any economic slowdown.
- Gulf Oil Lubricants
Its business includes manufacturing, marketing and trading of automotive and non-automotive lubricants and greases. According to a report by Yes Securities, the company’s significant market share, superior product portfolio and widened distribution network drive its outperformance.
The commencement of the Chennai plant has enabled the company to strengthen its position in the south and east. The brokerage believes that the stock is trading at attractive valuations and expects 16% earnings CAGR between 2017-18 and 2020-21.
Look for stocks with moderate to low market risk
These stocks have decent analysts’ recommendations and substantial one year forward price growth potential.
PE and ROE estimates for 2019-20. Adjusted EPS growth estimates for March 2019 quarter. *Actual number. Current price as on 7 May 2019. source: ACE Equity & Bloomberg.
- Bajaj Consumer Care
This is a FMCG company manufacturing cosmetics, toiletries and other personal care products. According to a report by SBICAP Securities, the company’s plans to double its market share in the hair oil category and strategic steps like micro segmentation, focus on cost excellence and multi-year transformational program will improve its financials going forward. The brokerage house believes the current valuations are appealing and expects 12% sales and earnings CAGR over 2018-19 to 2020-21.
- Abbott India
Analysts are bullish on this healthcare company because of the company’s strong debt free and cash rich balance sheet, new product launches, expansion in specialty business, healthy return ratios and strong parent backing.