Stocks that would perform in the next rally: A Merrill Lynch analysis

In a recent strategy report BoA-ML says given the speed of the rally, markets are vulnerable to correction and in this situation stocks that have underperformed and are undervalued may perform better than stocks that are expensive and already run up

With the market whooshing past in a frenzy in the last few thousand points, it is very possible that many investors missed the bus. Even if they haven't, the question on most investors' minds is, what now? In a recent strategy report to its institutional investors, BoA-ML says that it might be better to invest in undervalued stocks now since the pace of the rise suggests that a correction might be imminent. Even if there is no correction, and the market uptrend continues, the outperformers may see some rotation.

To arrive at a list of stocks which they believe could outperform from here on, BoA-ML ran some screens. It calculated the mean price to earnings ratio and price to book value of stocks from March 2005 onwards and compared it with their current PER and PBV multiples respectively (excluding stocks that have posted losses in between). The brokerage found that cheap or inexpensive stocks were trading at a discount or small premium to their mean values. Essentially what it found was that most auto, financials, consumers, and some cement names are trading expensive to historic valuations. Real estate, telecom, some pharma, commodity, media and engineering names are trading cheaper than historical valuations.

The report says that some of the large cap stocks that look attractive on this screen are Reliance, Zee, BHEL, Sterlite, Wipro and Maruti. Stocks that could be the most vulnerable in a correction could be SBI, ICICI Bank, HDFC Bank, HDFC, Bajaj Auto, Ambuja Cements, Bharti and ONGC. BoA-ML says that among the stocks that have lagged in the rally, Lupin Labs is one of its preferred stocks while it still continues to like stocks like Tata Motors and United Spirits that have been sharp outperformers in the rally.

Here are some more details from the report:

Stocks that have underperformed in the recent rally: Patni, Hero Honda, Maruti, India Cements, Reliance Industries, Zee, Sterlite, BHEL, JSPL, IVRCL, GMR Infra, Wipro.

Stocks that have outperformed in the recent rally: Tata Motors, Bajaj Auto, SBI, LIC Housing Finance, select PSU banks, DLF, ICICI Bank, Hindalco, Bharti, REC, Power Finance, Asian Paints, Godrej Consumers, Titan, M&M, Hindalco.

Stocks cheap relative to historic valuations: Real estate (like DLF, Purvankara, Omaxe, Anantraj etc.); software (Firstsource, Educomp, Wipro, Patni etc.); commodities (RIL, Sterlite); pharma (Biocon, Glenmark); telecom (Bharti, Idea), Zee and BHEL.

Stocks expensive relative to historic valuations: Autos (like Bajaj Auto, M&M); cement names (India Cement, Shree Cement); financials (LIC Housing Finance, REC, Shriram Transport, Federal Bank and select PSU banks); consumers (Asian Paints, Nestle, Dabur, Godrej); commodities (JSPL, NALCO, SAIL) and pharma ( Dr Reddy's, Cadila, Lupin).

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).


Anti-outsourcing bill blocked in US Senate

Washington: Senate Republicans successfully blocked the passage of an anti-offshoring bill that would have denied tax breaks to US companies which move jobs overseas, reports PTI.

Republicans in a 53-45 vote prevented the bill from overcoming a filibuster. At least 60 votes were needed to overcome the opposition's obstruction.

As per the bill, there will be a ban on government contractors from using American taxpayers' money to move jobs offshore.

What is seen as an electoral populist move, the Creating American Jobs and End Offshoring Act aims at small manufacturers and included a payroll tax exemption for firms that move jobs to US, but the bill also contains provisions to prevent businesses from deferring US taxes on the income they make from foreign subsidiaries.

Indian IT honchos had said the bill won't make much of an impact on India. However, they warned that US companies operating in other countries may be beaten by the same stick.

Several business groups such as the National Association of Manufacturers (NAM) were strongly opposed to the legislation. It had sent a letter to senators arguing the measure would make US corporations less competitive and hurt job creation.

Terming the bill as an election gimmick, Republican senator Orrin Hatch slammed the Democrats for their "height of irresponsibility" that would put the US economy at "greater risk."

"Desperate times call for desperate measures and the majority is showing how desperate they are with a bill that increases the tax burden on job creators and ship much-needed US jobs overseas."

Mr Hatch feared that "raising taxes on companies' overseas profits will just incentivize them to move their domestic facilities to another country... That is not the prescription that will cure our ailing economy."

Agreeing with Mr Hatch, senator Chuck Grassley said the bill would have resulted in a net decrease in American jobs.

"The legislation that was defeated in the senate today would make US companies pay an extra tax, of up to 35%, compared to foreign competitors, and really hit companies like John Deere, where they have big overseas markets."

The senator said that the reality of "consequences for manufacturing jobs" in the US was cast aside to create a debate for "political demagoguery."

Meanwhile, frustrated after the bill faltered, a Democrat senator Harry Reid said, "The bill we tried to pass today is based on simple common sense: to keep American jobs here in America... but Republicans continued their job-killing agenda today by protecting these tax breaks for CEOs who offshore American jobs."

The majority senator claimed that Republican policies have cost 8 million Americans their jobs. "We should stop forcing taxpayers in Nevada and across the nation to pay for giveaways that reward companies for sending American jobs overseas."


The edge of an abyss

The US dollar is “one step nearer” to crisis due to increasing American debt levels, says a former adviser to China’s central bank.

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