Stick to top quality stocks; best returns to come from these 4 sectors: Gautam Shah

Gautam Shah, Founder, Goldilocks Premium Research, says the current fall is a little overdone. The markets are gradually getting oversold and Shah does not see more than 2-3-4% downside from here whereas the upside potential is equally large. So, this is an opportunity one should make the most of it and not really think very short term.

Shah further says the clear message from the market is to stick to largecaps and even if you are doing midcaps and smallcaps, stick to top quality as they will survive. Narrative or story-based stocks will not survive. Best sectoral returns over the next one year will come from metals, IT, and pharma, along with select stocks in the financial services space.

Things are looking shaky. Could it get much worse before it gets better?
Gautam Shah: I am very happy that the markets are a little shaky at this point because when we ended September, there was this feeling that Indian markets are invincible and that domestic liquidity will keep taking prices higher forever and I think there has been a sort of a reality check in the last three weeks. This was much needed. Things were going out of hand at the start of October. There was a scenario wherein market breadth was not in sync with the market action and the market was gradually and internally getting weaker and weaker. That has really showed up in the last two, two-and-a-half weeks.

What would have surprised a lot of people is that in this period, world markets have been extremely strong and Indian markets have gone the other way. But I think this is a platform to the next leg of the bull trade. I do believe that the long-term uptrend of the markets remains intact and this is not any major trend reversal which people have started to talk about. This is another healthy correction like we have seen multiple times in the last three years. The market is already very-very light.

In terms of levels, we have been working with 24,000 as a number where the risk reward once again becomes very lucrative to take long trades and we are getting into a seasonally positive period of November and December and obviously with Diwali being next week. I do believe that the current fall is a little overdone. The markets are gradually getting oversold and I do not see more than 2%, 3%, 4% downside from here whereas the upside potential is equally large. So, this is an opportunity one should make the most of it and not really think very short term.

But the shakeout in mid and smallcap stocks is quite severe. There is a long list of stocks which are down 20%. There is a fat list of stocks which are down 30%. So, for a lot of these bull market heroes, the correction is quite stark. Isn't that scary? Nifty is good. But when you fall more than 25-30%, technically you are in a bear market.
Gautam Shah: Well, there are two ways to look at it. If you look at the headline indices, which is the Nifty 50, the NSE 500, the NSE Mid Cap Index and the Small Cap Index, they have actually not seen too much downside, maybe because quality, smart money seems to be chasing quality stocks and therefore, they have been quite insulated from this market decline of the last three weeks. But aside from that, as you rightly said, there has been a fall of about 25-30%.

But the problem is people are looking at how much the stocks have fallen from the highs. People are not assessing what kind of gains the same stock has witnessed over the last 12 months, which could be a 2x, 4x or a 5x. If after that move, stocks correct 25-30%, it is actually normal. In fact, even up to 40% is quite normal. So, I do not think that is too much of a problem. This is how the market consolidates. We have really gone through a time correction because if you look at the small cap index, where it was in early July is where it is in the last week of October.

We have gone through four months without any serious damage on the small cap index, but internally smallcap and midcap stocks have lost a lot of ground when you speak to people on the street. But the clear message is, stick to largecaps and even if you are doing midcaps and smallcaps, stick to top quality as they will survive. Narrative based stocks, story-based stocks will not survive.

Let us dissect the market and let us first talk about the largecaps. Small and midcaps (SMIDS) are bleeding. Within the largecaps, what are you witnessing in terms of some of the key stocks which may be now threatening their 200 DMAs or already subbed that and do you think there is going to be a further selloff in those?
Gautam Shah: Well, not many stocks are breaking their 200 DMAs as yet. More of a break below 50 DMA and 100 DMA is what has happened. If you look at the three major pockets of the Nifty, the banks, the IT index and Reliance. Reliance is a complete underperformer and it is going to remain this way for many weeks and many months to come, so that is not something which I am hoping for. But IT looks excellent on the charts and it is likely to rebound and likely to deliver 15-17% upside from this Diwali to possibly next Diwali.

So, we remain quite bullish. And banks do not have room on the downside because when I look at the top three names, HDFC Bank, ICICI and SBI, I am optimistic. I do not see these three stocks go down much. They might take time to go up, but the way HDFC Bank and SBI have behaved in the recent past, I am quite optimistic that the Bank Nifty is going to stay in that band of 50,000 to 50,400. If these two pockets of the market remain relatively strong, we are not going to get into collapse mode.

A 10-12% correction on the index is very normal and we have seen it multiple times in the 2003, 2007 bull market. So, it is not a surprise. It is just that people these days cannot handle any correction larger than 5%, which is okay, given the way markets have been for the last three years.

SBI is likely to do a special thing this year. That is one stock that you had and the other thing you said was this Diwali to next Diwali, IT is the best place with 15-17% return expectation. But what about autos? Would you buy that in any of the dips or that is looking very weak at the moment?
Gautam Shah: Auto as a sector is a complete avoid. That has been our stance for the last couple of months. We have been extremely bullish on it for the last couple of years because we spotted this mega breakout on the auto index and thereafter the follow through was amazing and some of these top stocks delivered supernormal returns. But the next three years of positive action in terms of news flow, fundamental news flow is in the price today. So, auto is a complete avoid at this point of time. I do not see any opportunity there. It will remain in consolidation and correction mode for many weeks to come.

Along with IT, the other sector that we like and we have been advocating for a while now is the metals index. It is at a point from where it could actually deliver one of the best sectoral returns over the next one year. So, metals, IT, and pharma would really be on top of our list, along with select stocks in the financial services space.