Investing at all-time high? Samco's Nirali Shah tells how to spot quality stocks on Dalal Street

Benchmark equity indices BSE Sensex and NSE Nifty have rallied more than 100% from their March 2020 lows to scale fresh closing highs on July 15. During the period new breed of investors have entered the market to made quick gains from the ongoing bull run. Now the question is whether they should stick with their current holdings or it is time to book profit? In an interaction with Money9.com, Nirali Shah, head of equity research, Samco Securities tells how investors can pick quality stocks and protect themselves from value trap.

Edited excerpts:

Q: What is your advice to new investors who have entered the market after March 2020 lows?

Shah: Rock bottom interest rates and lockdowns led to a new breed of investors to join the bull party and open accounts. But these newcomers who have never been a part of the bull rally should know that markets don’t go up in straight lines and corrections are eminent. This time is ideal for investors to rejig their portfolios by booking profits from fundamentally weak companies and investing into compounders on every dip. Keeping only cyclicals in their portfolios can also prove to be harmful since the timing has to be mastered in such stocks. Following herd mentality and tips can also entail losses when the sentiment reverses. Hence, new investors shouldn’t get carried away with the grandiosity of the bull market and should instead focus on developing the skill to picking gems from a sea of over 4,500 stocks. There are various tools such as Samco’s Stock Rating available, free of cost, to help investors pick the right stock. It is very unique because it rates individual stocks on their fundamentals, technicals, margin of safety, valuations etc. Since the rating is driven by a Giga Trading Algorithm it is all automated and includes no form of human bias. This can help investors avoid value traps and compound their wealth as Stock Rating daily analyses all the 4,500 listed stocks for any significant developments. New investors should therefore continue their investing journey with the help of such tools so they don’t burn their hands in the wrong stock.

Q: Do you think the ongoing rally will sustain despite rising fuel prices?

Shah: India’s June headline inflation numbers like CPI and WPI somewhat eased on a MoM basis but continues to remain well above RBI’s comfort levels. Having said that, in the near term, markets do seem frothier and seem to be undergoing a time correction. Mixed global macro signals, uncertainty regarding future lockdowns and anxiety around Fed’s decision to hike interest rates are key deterrents for Mr Market’s rally atleast for the coming months. The aggression to touch the 16,000 mark seems to have eased in the near term.

Q: What are the other key risks do you see now?

Shah: The primary key risk India faces is from the RBI’s decision to hike repo and reverse repo rates. A balancing act will be required by our central bank to manage macros such as inflation, forex reserves and our debt to GDP. GST collections of June have slipped below the Rs 1 lakh crore mark which is also a risk for our growing fiscal deficit. Further, India being a key importer of crude, the rise in oil prices will add more pressure on our outflows. All these factors combined add to our economic risks.

Q: Where do you see Sensex and Nifty by the end of December 2022?

Shah: Defying gravity, both Sensex and Nifty have more than doubled since 2020 mainly due to strong corporate earnings recovery coupled with advancement on the vaccine front. Expectations of a 10-12% growth by benchmark indices in the coming year too would be fair. However, there will be punctures to this trend especially if inflation continues to defy the threshold levels and remain too high for comfort.

Q. How do you pick quality stocks at all-time high levels?

Shah: Given the current high levels in the markets, investors should apply a bottom-up approach rather than top-down. The first filter would be to pick the fundamentally strong stocks. Certain names would be trading at expensive multiples, in such cases waiting for a dip to invest in a staggered manner will be beneficial. The margin of safety should be a key factor to watch at such levels because as John Bogle says “Reversion to the mean is the iron rule of the financial markets” and all stocks which have elevated will correct at some point. Hence, timing is also key and tools like Stock Ratings have already taken an individual stock’s margin of safety and valuation into account before coming out with a rating. This techno funda approach to stock picking will enable investors to avoid overvalued stocks whilst creating a wealth compounding portfolio.

Q: Can you suggest few stocks which can give lucrative return to investors in the next 3-4 years?

Shah: With markets trading at all-time high levels currently, there are limited pockets of opportunities in terms of valuation comfort. However, on every dip investors can accumulate stable companies like HDFC AMC, Hindustan Unilever and leaders in the private banking space which make good bets from a 4 to 5 year horizon.

Q: Which are the mistakes investors should avoid after 100% rally since March 2020 lows?

Shah: Investors sometimes get into stocks too late due to FOMO, which should be avoided because more often than not it means that he has missed the meat of the rally. Also, if he has done his research and is in good stock, he should let the profits ride and not react impulsively on news. Patience and discipline go hand in hand and are key to happy investing. Not falling for tips and being aware of greed and fear cycles in the market are also some principles investors should remember. When markets are at all-time highs, an investor can review his portfolio as it is an ideal time which market gives you an opportunity to exit the weak stocks, which are not aligned to your risk profile.

Q: Which sectors do you think can take over now?

Shah: With the unlock theme playing out, the distressed sectors might see a turnaround. Apart from that, financials can benefit from an increase in interest rates. Gold lending players and consumer durables might also witness traction going forward.