Stock market strategy: Sharp disconnect between earnings revision and stock price movement, says Bernstein

An investigation of the apical 200 stocks successful India shows a crisp disparity betwixt the banal terms movements and the net growth.

In the past 3 months, 77% of the NSE200 stocks person seen affirmative terms movements, but lone 39% person seen net upgrades. Sectors with decent net upgrades amusement a disproportionately precocious question successful their banal prices - suggesting an optimistic overpricing, Bernstein India analysts Venugopal Garre and Nikhil Arela said successful a report.

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Moreover, the net revisions crossed the past 2 months person been a specified 0.6%, and the past period has seen a decline.

Smallcap and Midcap stocks (SMID) witnessed awesome returns nearing 21% this twelvemonth and 19% implicit the past 3 months. However, their net expectations person travel down, which has further inflated their valuations. 

“A stark quality is seen successful the apical 100 and bottommost 100 of our NSE200 stocks, with FY25 net of the apical 100 astir level c.1% portion the bottommost 100 declined by 2.6% implicit the past 2 months. This has led to astir fractional the midcap 150 stocks trading astatine a 1-year guardant PE of 40x oregon more. For ample caps, this fig is astatine 41%," Bernstein study said.

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Sector-wise analysis

Among sectors, 7 of 13 sectors amusement a diminution successful the erstwhile 3 months, and the mean is hardly 1%. According to the Bernstein report, metals and industrials look to beryllium the lone sectors that person seen an acceleration successful the past 2 months. 

“Metals and industrials look to beryllium the lone sectors that amusement a pick-up. Still, the disparities wrong are beauteous high, and galore salient names grounds declining net expectations for FY25. Autos and Energy are the different 2 sectors that amusement momentum but person slowed down considerably compared to the play before. Financials is seeing a humble 1.6% increase, portion each different sectors are level oregon negative," Bernstein said.

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Strategy going ahead

Bernstein believes determination is constricted scrutiny connected net successful specified phases of markets and immoderate thought is rationalized arsenic the adjacent wealthiness generator. Additionally, a wide affirmative 50-year presumption connected India suffices the concern thesis and investors unreserved successful to neutralize immoderate valuation arbitrage they see. 

According to Bernstein, this benignant of “investing", with a negligible appraisal of models and governance, stays bully till the rhythm peaks. 

Momentum chasing successful the abbreviated word is excessively lucrative to enactment distant from. Still, a longer-term play connected bottom-up ideas volition ever support 1 harmless erstwhile the domino effect takes over, it added.

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Disclaimer: The views and recommendations made supra are those of idiosyncratic analysts oregon broking companies, and not of Mint. We counsel investors to cheque with certified experts earlier making immoderate concern decisions.

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Published: 28 Jun 2024, 11:44 AM IST