4Q 2013 Stock picking guidelines – Back to basics

Monday, 9 September 2013 00:17 - - {{hitsCtrl.values.hits}}

By First Capital Equities In order to benefit fully from the Bourse’s movements in 2013, we believe that investors may have to revisit the basics of equity investing to derive maximum returns at their accepted level of risk.

While most domestic investors are currently discouraged to enter the Bourse on the grounds that the market has not delivered having declined by 2.8% (in rupee terms), quality stocks listed on the bourse did however generate double digit returns and may replicate their performance during the remainder of the year. As we reiterated in our previous weeklies, we advise investors to refrain from ‘buying the market’ but rather focus on actively seeking bluechip counters that are cash generative (and are able to successfully pass on any cost increases without losing market share) in high growth sectors that are likely to outperform. Key factors to consider when investing in the current sideways movement of the Bourse: Define risk appetite; define expected rate of return; define investment horizon; decide on sector; decide on stocks within sector. Market trajectory: With both buyers and sellers largely sitting in the wings in anticipation of a market trigger, as we head closer towards the end of 3Q 2013, we expect market activity to remain relatively restrained in the near term. Nonetheless, we believe that the current consolidation process will deflate the market to an attractive valuation level but at still a strong economic growth rate. This we believe would provide the tailwind necessary to thrust the market into a rise resulting in a gradual increase in multiples, however not too high to cause a headwind. We believe that the PE compression consequently will emanate from firm EPS growth especially from 1Q 2014 onwards which would trim any excessive build up in valuations thus keeping them at reasonable levels. However, as we have reiterated in our previous weekly reports, even with our bullish economic outlook, we advise investors to adopt a bottom up stock selection approach. We believe that fundamentals, sector bias, price to growth valuations and the ability of companies to successfully pass on any increase in input costs (and consequently sustain margins) will hold the key in selecting quality equities on the Colombo Bourse.