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If earnings fail to take off in the first quarter of 2019-20, there could be a strong market sell-off, say experts. Fears of economic slowdown, global trade wars, the NBFC credit crunch, and high unemployment are some of the other issues that have the market worried. Even the Budget failed to cheer the investors. In such a situation, how does one pick winning stocks?

One way is to invest in fundamentally strong stocks that have reached the most number of highs over a given period. Stocks reach new highs when there is strong buying interest due to their promising prospects.

Looking at the new highs that the market indices have touched in the past five years using daily closing price data—1 July 2014 to 9 July 2019—the BSE500 Index has failed to touch a new high in 2019. The last high it touched was 15,846 on 31 August 2018. The BSE100 and the BSE200 touched four and one new highs respectively, whereas the BSE Sensex scaled eight new highs in 2019. In terms of the constituent stocks, 418 or nearly 84% of the BSE500 stocks failed to touch new highs in 2019 compared to their highs over the past five years. For stocks whose price data was not available for the past five years, we looked at the period from their listing date to 9 July 2019.

We filtered out the companies with market-cap greater than Rs 500 crore and whose stocks hit new highs more number of times compared to the BSE100, the BSE200, BSE500 and the BSE Sensex in 2019. To determine the fundamental strengths of such stocks, their annual results for 2018-19 were analysed and those with substantial improvement in sales growth, operating profits (including other income) growth and adjusted EPS growth relative to 2018-19 were selected.

Out of these, we looked at stocks whose 12-month blended forward ROE was more than the 12-month blended forward ROE of the BSE500 index, as estimated by Bloomberg. Two additional filters were applied to filter out stocks covered by at least five Bloomberg analysts and those expected to appreciate by more than 10% over the next one year. Only the following five stocks passed all our filters.

Stocks that touched new highs in 2019

Analysts believe that this portfolio of stocks could give 15% average return over the next one year.

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*Relative to past five years. #Analysis from listing date. PE and ROE (%) estimates for 2019-20. Current price as on 15 July 2019. Source: ACE Equity and Bloomberg.


Inox Leisure

This company is engaged in the business of film exhibition. Analysts are bullish on it due to its strong performance in the fourth quarter of 2018-19—revenue rose 48% and Ebitda (earnings before interest, tax, depreciation, and amortisation) margin improved 6.8%. Moreover, the decent growth momentum in advertisements is likely to aid margin expansion. The company is likely to be a key beneficiary of favourable structural changes such as reduced Goods and Services Tax rates, which have led to higher ticket volumes, lower content risks and aided investment in new technologies.

Titan Company

It operates in the lifestyle space and is present in 32 countries, besides India. Titan’s business segments include jewellery, accessories, and eyewear. According to a recent report by JP Morgan, the company’s medium-term growth outlook remains good. It is supported by various initiatives to drive higher sales of wedding and fashion jewellery. Moreover, the company will benefit from a higher market share as jewellery purchases shift to organised players and the unorganised segment becomes less competitive.

Varun Beverages

This is a franchisee of carbonated soft drinks and non-carbonated beverages sold under the trademarks owned by PepsiCo. According to a research report by Yes Securities, the company’s recent acquisition of the PepsiCo franchise in the South and the West will provide it access to these regions with lower product penetration, reduce seasonality and will improve revenue and earnings visibility. The brokerage house feels that the stock is available at reasonable valuations and expects its return ratios to improve on account of better economies of scale and higher asset turnover.

Atul

An integrated chemicals company, Atul’s business segments include life science chemicals and performance and other chemicals. Analysts believe that the company’s strong balance sheet, strong cash flows and improving return ratios make it an attractive investment opportunity. Rising demand from industries that use chemicals and recognition of branded products will drive the company’s growth. Additionally, a focus on higher margin products, cost and operational efficiencies, coupled with strong pricing environment, will help the company sustain its Ebitda margin.



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