The recent market downturn has led to a sharp decline of 30-50% in several stocks, leaving investors questioning whether now is the right time to buy. Kotak Institutional Equities has weighed in on the matter, cautioning that despite the steep selloff, many stocks remain overvalued. The brokerage firm has identified certain defence, railway, and renewable energy stocks as “narrative stocks” but warns that the market as a whole still appears expensive.
Kotak’s Take on Market Valuations
Kotak Institutional Equities notes that despite the market correction, most stocks continue to trade at historically high valuations. The firm remains skeptical about a significant upside in the near term. It suggests that investors should be cautious, as many stocks may not have hit their true bottom.
Referring to the concept of a ‘dead cat bounce,’ which describes a temporary recovery in stock prices during a prolonged downtrend, Kotak warns that this rebound may not be sustainable. “The cat may either be dead or likely to die if dropped from a sufficient height, despite its fabled nine lives. The image will be too ghastly to imagine,” the brokerage stated.
Narrative Stocks: Defence, Railway, and Renewable Energy
Kotak has highlighted specific stocks in the defence, railway, and renewable energy sectors that investors should watch. These include:
- Defence: Bharat Dynamics (BDL), Mazagon Dock Shipbuilders, and Cochin Shipyard
- Railway: Titagarh Rail Systems, Rail Vikas Nigam Ltd (RVNL)
- Renewable Energy: Suzlon Energy
- Utilities: SJVN and JSW Energy
While these stocks have seen a sharp decline, Kotak warns that their market capitalizations remain high relative to their earnings, net worth, and assets.
Are Investors Focusing Too Much on Retail Inflows?
Kotak believes that investors are placing excessive emphasis on the steady retail inflows into domestic mutual funds while overlooking fundamental business models and valuations. The firm points out that these inflows have continued despite the market downturn, proving ineffective in predicting market peaks or bottoms.
“Flows have proven (again) to be absolutely useless in figuring out the peak of the market and the subsequent correction. Retail inflows into domestic mutual funds have continued unabated, and they will prove useless in predicting the market bottom,” Kotak stated.
Stock Categories: Where Are the Valuations Now?
Kotak Institutional Equities classifies stocks into different valuation categories:
- Consumption stocks: Trading at “full-to-frothy” valuations despite short-term growth concerns and medium-term disruption risks.
- Investment stocks: Valued fairly but not offering much upside potential.
- Outsourcing stocks: Trading at “fair-to-full” valuations, particularly in IT services and pharmaceuticals, where short-term demand remains uncertain.
- Banks and NBFCs: The only sector where valuations appear reasonable.
The brokerage firm emphasizes that headline market valuations are misleading due to a significant disparity in stock valuations and the dominance of low price-to-earnings (P/E) sectors in overall market profits.
No Easy Money in the Secondary Market
Kotak also reminds investors that the secondary market operates on a simple principle: for every buyer, there must be a seller. This means that stock prices are determined by the expectations of all market participants.
“There is no money in the secondary market — somebody buys, somebody sells at all prices. Expectations of returns influence buying (inflows) or selling (outflows) decisions, and the price of a stock is the clearing price based on these expectations,” Kotak explained.
Should You Buy Now?
For investors looking to enter the market after the recent selloff, Kotak’s analysis suggests caution. While certain stocks may appear attractive after their price drops, their underlying valuations may still not justify an immediate buy. Instead, a focus on business fundamentals, long-term growth potential, and reasonable valuations should guide investment decisions.
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