Does a ‘dead’ cat really bounce, Kotak Institutional Equities posed this question in a strategy note today, while suggesting that many ‘narrative stocks’ might have fallen 30-50 per cent in the recent selloff, they may still be trading at unfathomable valuations.
The brokerage said it does not find much value in the market despite the severe market correction. “Most parts of the market are expensive on an absolute basis or on a historical basis,” it said.
Speaking on the ‘dead cat bounce’, a market term used for a small and brief recovery in stock prices amid a major selloff, Kotak said the cat may either be dead or likely to die if it is dropped from a sufficient height, despite its fabled nine lives. The image will be too ghastly to imagine, it warned.
Kotak sees defence stocks such as Bharat Dynamics, Mazagon Dock Shipbuilders and Cochin Shipyard; railway stocks Titagarh Rail System, Rail Vikas Nigam Ltd (RVNL); renewable player such as Suzlon Energy; utilities such as SJVN and JSW Energy as narrative stocks. Several PSUs still trade at extremely high market caps relative to their profits, net worth or assets, it said.
The domestic brokerage feels that stock investors were focusing excessively on retail inflows into domestic mutual funds, but not enough on business models and valuations of companies.
“Flows have proven (again) to be absolutely useless in figuring out the peak of the market and the subsequent correction (retail inflows into domestic mutual funds have continued unabated), and they will prove useless in predicting the market bottom,” Kotak said.
Kotak said consumption stocks trading at full-to-frothy valuations, especially in the context of short-term growth issues and medium-term disruption risks. It said investment stocks are trading at fair-to-full valuations and outsourcing stocks trading at fair-to-full valuations, especially in the context of short-term demand (IT services) and market (pharmaceuticals) risks.
“Only the banks and NBFCs seem to be reasonably valued. Headline market valuations are misleading, given the wide disparity in
valuations and a large share of profits of low P/E sectors,” it said.
Kotak said there is no money in the secondary market — somebody buys, somebody sells at all prices. It said expectations of returns influence the action of buying (inflows) or selling (outflows) of an investor and that the the price of a stock is the clearing price based on the expectations of all market participants.
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