As bulls and bears fight over Nifty, investors should focus on 6 largecap stocks with right mix of RoE & R

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.

The correction which was essentially started with a large cap segment has moved into mid-cap stock. It is not the first time this correction has taken place and a similar trend is visible in the past also. In such times it would be better to select stocks where analysts are bullish. ET screener powered by Refinitiv’s Stock Report Plus lists down quality stocks with high upside potential over the next 12 months, having an average recommendation rating of “buy” or strong buy . This predefined screener is only available to ET Prime users.

Normally FMCG sector is associated with the power of brands. However, there are many industries, where a strong brand plays an important role. There are enough examples of firms that have built strong brands & have been getting premium on Street. The reason, a strong brand helps a company weather storms of an economic slowdown or inflationary pressure. Also over long term the final cost of doing business is lower, margins are higher as the concept of reverse working capital comes into play when the brand is strong. Yes, there are phases where they underperform because sometimes their valuations do get stretched, but then over time earnings do tend to help in normalization of valuations.

Once again bulls have shown that while bears have the right to make a comeback attempt, bulls who have ruled the street for the last three years are in no mood to give up easily. That was reflected in improved market breadth even though nifty and sensex had been only moving in range bound mode. While the recent performance has been good, given the valuations, it would be better to be selectively bullish and put more checks and balances both in terms of quantitative and qualitative parameters while looking at stocks.

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.

Extended deal closure periods, insourcing, large contract cancellations, vendor consolidation and project ramp-downs are now co-existing with large deal announcements and elevated outsourcing demands. Midway into the year, indecisive technology investment sentiments have not improved any further from where they stood at the beginning of the year. What does the rest of the year look like?

While one event risk is state election results getting over, there is a chance that in the next few trading sessions will see a bullish move. But as the valuation is surely not in the cheap zone, it would be better that as an investor stay focussed on the business you are owning. Businesses which have a track record of being able to deal with all the swings of economic cycles. It is the large cap companies with strong balance sheets, strong brands which probably the ones which should be looked at in these conditions.

Capital good companies had faced tough times for many years. Given the fact that hardly any capacity buildup was taking place in any industry, a number had to change their product portfolio and had to live with very low margins. But all the efforts have now started to show some results. Given the performance of the stock, a large majority of these stocks have hold recommendations from the analysts.

Every business has its own capital requirement matrix and this is what makes them prone to risks of interest rate cycle. Of all the stocks, which our algorithms come up with, we took companies from three sectors. On the list, there is one of the biggest wealth creators from the specialty chemical space. ET screener powered by Refinitiv’s Stock Report Plus lists stocks with high upside potential over the next 12 months, having an average recommendation rating of “buy” or strong buy .