Bias of volatility may have changed: 5 largecap stocks from different sector with upside potential of up t

After a phase of relative under-performance to mid caps stocks, there has been a recent catch up by large cap stocks. While there is no denying that sentiment is positive, because valuations are high, any negative news will have a higher impact on stock price. So, incremental exposure should be more toward large caps. Businesses which have a track record of being able to deal with all the swings of economic cycles and even take higher advantage of economic boom. It is the large cap companies with strong balance sheets, strong brands which probably the ones which should be looked at in these conditions.

Volatility never gives notice before coming and again on Monday, it did not give one. The difference is that this time the impact of volatility was felt by more investors and traders. There are two probable reasons, list of top loser on Monday was dominated by PSU stocks which have been the best performing set of stocks in last few weeks and that all those who only recently realized that there is something called PSU and jumped on the bandwagon are probably looking at their phone and saying why have their portfolio has fallen so hard. Second, the overall market breadth was extremely bad which means more portfolios got hit. There is a high probability that volatile movement in broader markets might continue for some time, So, it would be better to stay prepared for volatility. One of the ways for that would be to stay with large caps and especially the ones which have shown streak of outperformance at a time when other large caps have been under pressure.

There is an age old saying on Dalal street, when stocks stop reacting to bad news, it means that bears have run out of ammunition and probably it is time to look at them. Similarly when stocks stop reacting to positive news, probably bulls will not be having a say in the near term. At this point of time, there is an interesting phenomenon which is playing out. While at the overall market basis, it appears that bulls may not have much to say in near term. But at the same time, there are two sectors, which have been getting bombarded with bad news for the last two years. Whether it is macro or micro, news or opinion, literally everything which has been said about them is either negative or at best neutral. But if one looks at price action on the counters on any bad news or even brokerage downgrades which is essentially an opinion stock prices are refusing to fall. Historically one of these two sectors were considered defensive,as stocks from this sector tend to outperform in bearish markets. So, is it the time to go against the narrative of negative news and get them on the watch list?

Once again everything is looking green, the way FY 25 has started, it appears that bulls were on short term break due to tight liquidity conditions which tends to appear in the last month of every financial year. While the local liquidity condition might improve, the issue of high valuation is still not over. It is still a time to be cautious in terms of not going overboard with taking exposure to a certain stock, selective about what one is buying. The reason, if the street becomes selective and gets into correction mode once again, it is stocks where there has been improvements in the business operating matrix will be able to weather the storm better. These selected stocks depict a strong upward trajectory in their overall average score which is based on five key pillars i.e. earnings, fundamentals, relative valuation, risk and price momentum. This implies that there has been a significant improvement in their market outlook in the given time frame.

As broader market indices witness minor consolidation, which normally happens when they are close to all time high as some resistance is bound to come. Some stocks have witnessed consistent improvement in their scores. The selected stocks depict a strong upward trajectory in their overall average score which is based on five key pillars i.e. earnings, fundamentals, relative valuation, risk and price momentum. This implies that there has been a significant improvement in their market outlook in the given time frame.

Volatility never gives notice before coming so one should always be prepared for it. Another point to be watched, if the frequency of the volatile phase increases and it starts to happen every other fortnight, it might be an indication of strong headwinds. For a large number of investors, volatility is only when mid-cap stocks correct. But the problem is that by the time they feel the heat of the correction the price damage is very high. So, it would be better to stay prepared for volatility. One of the ways for that would be to stay with large caps and especially the ones which have shown streak of outperformance at a time when other large caps have been under pressure. Another reason for staying with large caps is that valuations are high in large part of the mid and small caps and they are the ones which might lose more weight if the markets stay under pressure due to profit booking.

While there are clear signs of large cap stocks making a comeback on the street, it is reflected both in movement of Nifty sensex. The problem is that as a word the “large cap” is so open ended and we keep seeing stocks moving in and out of that category which are the ones which one should focus on. If one looks at the last six months of the stock market moves, a new industrial house appears to be born and has caught the fancy of the street. Yes, we are talking about PSU as a set of companies. It is not owned by one individual but by the government of India so there is an element of the largest shareholder being one entity and that is why it may be called a new industrial house. Beside the ownership another common thread running in these companies is the impact of the clean up and restructuring of policy framework which has come in different sectors and in these companies in particular. So there is high probability and yes only high probability of these stocks doing relatively better in stormy conditions on the street.

However if one looks at the history of financial markets, there are phases where multiple challenges have come up for the sector at the sametime. But given the savings matrix which Indian’s have, despite all that may have happened, on an overall basis the financial services industry has grown and some select stocks have given decent returns to their shareholders.

At a time when worrying about what will happen to the global financial markets is the norm, it is better to stay focussed on long term wealth creation and companies which have the right combination to make it. Of all the stocks, which our algorithms come up with, we took companies from four sectors: defence, FMCG, agrochemical and natural resources. ET screener powered by Refinitiv’s Stock Report Plus lists down stocks with high upside potential over the next 12 months, having an average recommendation rating of “buy” or strong buy .