Stocks to buy: Consider reasonably valued companies; 5 stocks with up to 38% upside potential
Apart from global factors, expensive valuations, especially in the mid-cap and small-cap segments, and the tepid June quarter earnings performance of corporate India are contributing to the rising volatility. The TTM (trailing twelve months) PE of Nifty Midcap 100 and Nifty Smallcap 250 indices is trading at a premium of 28.5% and 35%, respectively, relative to their five-year average, according to the data compiled from Trendlyne.
Research by Capitalmind Financial Services indicates a higher probability of correction in the BSE Smallcap 250 index if earnings don’t catch up. “The PE multiple of BSE Smallcap 250 has expanded by 63%, whereas EPS is flat at -3 %. This expansion is mostly due to the price increase. The continued flat trajectory in the earnings could escalate to a high probability of price correction,” states the study. The study is based on one-year data ending 11 July 2024.
The higher valuations are mainly driven by sustained liquidity flows and analysts are concerned about their sustainability. “Pockets of high valuations supported by easy global liquidity over the past few years could be at risk,” says George Thomas, Fund Manager, Equity, Quantum AMC.
Looking at the June quarter earnings, the interim earnings review report by Motilal Oswal states that the earnings growth of 163 of its coverage companies declined by 2% year-on-year. Sectors like metals, oil & gas, cement and speciality chemicals dragged the performance. In the Nifty 50 index, 39 companies that have declared results so far,
