3 Stocks to Buy with an Eye on 2021
Chakri Lokapriya CIO & MD of TCG AMC said “Finance which is trading well below their median multiples, is going to surprise on the upside”
Everyone is expecting that 2021 is going to be a good year. This is the time to look for stocks with accelerating business momentum. It can be in any sector be it both auto, auto ancillaries, consumer discretionary, or banks. Take the example of a company like JK Tyre so many things are going on for it.
First, the company has regained its business momentum. There is an expectation that commercial vehicles will do well.
Second, if you look at say Federal Bank NSE 3.43 %, it is trading at about 0.6-0.7 times the price to book on FY22 and then it trades normally at about 1.2. They have cleaned up their book quite well. The provisioning is quite good.
Third, among consumer discretionaries, take Crompton Greaves NSE 4.97 %. It is a company which has lots of low priced consumer durable products. It is less expensive than other high priced consumer durable companies.
Similarly, Eicher Motors is a company that had a very strong brand recall. Lately, they have been doing more of the good things in terms of their product positioning and the right kind of movies so that there are a greater brand and aspirational recall. On the other hand, they are at a price point where one step higher and they will start competing with Triumphs and the Harley Davidsons of the world. A few points lower and there are Bajaj and Hero Motor.
They would probably find it tougher to move up the price point with new additional luxury models because their competitors are the Triumphs and the Harley Davidsons of the world. But if they expand in this niche segment across other countries, a growth path is still ahead of them. Given that sales have not been that strong for the last couple of years, with the economy emerging out of the Covid lockdown, some amount of demand loss will come back
There are a few things that we are looking at first is the momentum of the business of a particular company. If business momentum is coming back on an accelerated basis, it should show up in terms of revenue growth. So, is the company being able to grow its revenue faster than that of its competition?
Second, we have to see if financials are improving and whether they are deleveraging so that the balance sheet and P&L are becoming stronger.
Third, if these two factors are in place then your stock market returns will happen as a consequence. Against that context, I am looking at growth companies.
Take the example of companies like JK Tyre or Crompton Consumer or even a company like Cholamandalam Finance. These are companies that are trading well below their median multiples. Their loan growth rate is going to surprise on the upside. I can bet my bottom dollar that in the next couple of quarters, analysts will move up the numbers, not just for these companies but across sectors.
You will find some names in banking sectors like Federal Bank. for trading purposes, public sector banks are a good option. Take Canara Bank as an example, it trades at about 0.3 times book. It is raising capital and now it has a good business momentum which can translate into a price momentum for a good 15-20% upside from the current levels.
Union Bank is another bank that is trading at a similar valuation. Its fundamentals are improving and translating into price momentum and these have been laggards, not just in the last six, eight months but laggards over the last couple of years. But now with peak provision insight, some of the PSU banks like Canara Bank and Union Bank are also looking like good positional trades.
Bharat Electronics is also a good candidate. It is a media-shy company and does not talk. Recently they had an analyst meet and they reiterated some goals. The defense is an important agenda for the government. The company in itself stock price has not done much, it has done in line with the market may be at best and so its earnings are going to grow at least 18-20% with visibility, ROEs at about 20%, stock trades at about 12-13 times. It has enough price momentum left in it for it to outperform from the current levels for another 20-25% odd.