Three stocks to avoid for the next six months: Raja Venkatraman

Export-driven sectors, including IT companies, are on shaky ground because of global uncertainties and volatile demand. Companies trading at stretched valuations could also face a sharp reality check during market corrections.

For investors, the strategy is clear: don’t chase flashy opportunities. Instead, prioritize diversification and opt for fundamentally sound companies with a proven track record.

Assess thoroughly before you invest—the road ahead is not for the faint-hearted. A clear, informed strategy will help you navigate volatile markets and emerge stronger.

Factors to consider on what stocks to avoid

Overvalued stocks: These are stocks with skyhigh price-to-earnings, or P/E, ratios not backed by strong business fundamentals. Their growth might be unsustainable and at higher risk of correction. Pay close attention to valuations versus industry peers. Avoid the hype around “hot" stocks without proper analysis. It’s better to invest in value than chase overpriced opportunities.

Declining sectors: Certain sectors may underperform due to economic downturns or policy changes. For example, industries heavily dependent on discretionary spending could face challenges during inflationary periods. Stay informed about sectoral trends and macroeconomic impacts. Diversification can help mitigate exposure to weak industries.

High-debt companies: Companies with significant debt struggle in rising interest rate environments as borrowing costs increase. Check debt-to-equity ratios to assess financial health. High leverage can amplify losses during downturns. Avoid companies that might face liquidity issues or credit downgrades. Opt for firms with stable cash flows and manageable debt levels.

Underperforming stocks: Stocks consistently trailing their peers may indicate poor management or unfavourable market conditions. Look at historical performance relative to the sector or index. Identify if there’s potential for recovery or a threat of further decline. Avoid companies that don’t show a clear path to improvement.

Stocks with weak earnings: Declining revenues and profits can signal deeper issues within a company. Analyze quarterly earnings reports to assess how a company plans to address declining performance. Weak earnings often lead to reduced investor confidence. Avoid such stocks unless there’s a compelling turnaround potential.

Other evaluation factors

Market trends: Keep an eye on global and domestic economic data such as GDP growth, inflation, and interest rate decisions. Monitor geopolitical events that may affect market sentiments. Observe sectoral performance for emerging or declining trends. Stay updated on technological advancements impacting specific industries. Understanding such trends helps align your investments with broader market directions.

Company fundamentals: Study a company’s financial statements, including income, balance sheets, and cash flow. Evaluate profitability metrics such as return on investment, margins, and net income growth. Assess the company’s competitive edge in its industry. Understand the management’s vision and execution capability. Fundamentals reveal the true worth of a business beyond market noise.

Sector performance: Different sectors perform differently in varying economic conditions. For example, defensive sectors like healthcare may shine during downturns while tech thrives in growth periods. Analyze recent sectoral reports to see which industries have momentum. Avoid sectors facing regulatory challenges or declining demand. Sectoral insights help diversify portfolios effectively.

Valuation metrics: Metrics like P/E ratio, price-to-book value, and EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation, and amortisation) can signal overvalued or undervalued stocks. Compare these metrics to industry averages to gauge a stock’s relative value. Avoid overly expensive stocks unless its growth potential is evident. Undervalued stocks may offer better risk-reward opportunities. Use multiple metrics for a more comprehensive analysis.

Stocks to avoid

Based on these factors, we evaluated the current market scenario to select some stocks that do not look promising for the next six months.

Indian Railway Catering and Tourism Corporation Ltd (IRCTC)

Here are some of the factors that have been influencing the underperformance of this counter:

Overvaluation concerns: IRCTC has a monopoly in online railway ticketing and catering, which often leads to high valuations. However, its current share price may already reflect most of the positives, leaving limited room for growth.

Government intervention risks: Being a government-owned entity, IRCTC is subject to policy changes and interventions, which can impact its profitability.

Sectoral challenges: The travel and tourism sector is sensitive to economic downturns and external shocks, which could affect IRCTC’s revenue streams.

Revenue dependency: A significant portion of IRCTC’s revenue comes from internet ticketing, making it vulnerable to changes in user behavior or competition.

Limited diversification: While IRCTC has ventured into areas like packaged drinking water, its core business remains heavily reliant on the Indian Railways.

The above points and a steady fall in IRCTC’s share price the past few months point to a lack of investor interest in the stock.

Even if India’s stock market rebounds in the near term, the IRCTC stock would take some time to pick up and regain its upward traction due to the lack of supporting developments. Hence, it’s best to avoid any bottom-fishing in this stock as a move below the value area support at ₹600 could attract an accelerated sell-off. IRCTC ended trading on Thursday, 13 March, at ₹689.75. Friday was a market holiday on account of Holi.

Angel One (ANGELONE)

Some of the factors influencing the underperformance of this counter are:

Market volatility: As a brokerage, Angel One’s performance is closely tied to market activity. A slowdown in trading volumes or bearish market conditions could impact its revenue.

Competitive pressure: The brokerage industry is highly competitive, with new players offering lower fees, which could erode Angel One’s market share.

Regulatory risks: Changes in financial regulations or compliance requirements could increase operational costs.

Recent weak performance: The stock has shown bearish trends recently, with significant declines in its share price.

Dependence on retail investors: A large portion of Angel One’s business comes from retail investors, making it vulnerable to shifts in retail trading behavior.

The Indian stock market’s decline since September has impacted the domestic broking industry. While Angel One’s profit has improved its share price does not reflect investor enthusiasm in the stock. This is a disconnect that will take some time to resolve.

As this chart indicates, Angel One’s share prices had started to give away and a gradual descent was visible from the first half of 2024. The moving average convergence divergence offers a more granular perspective. The MACD crossover in May highlights that a lack of enthusiasm had begun to extend and the last few weeks have been quite painful for the stock.

With the support around ₹2,200 being broken decisively, the next few weeks could be quite laboured even if we witness a market recovery. Angel One ended trading on Thursday at ₹1,954.00 per share.

IndusInd Bank (INDUSINDBK)

These factors have been influencing the underperformance of this counter:

Accounting discrepancies: Recent revelations of accounting irregularities in the bank’s forex derivatives portfolio have raised concerns about internal controls and governance.

Regulatory concerns: The Reserve Bank of India’s decision to limit managing director and chief executive office Sumant Kathpalia’s extension to one year instead of the board-recommended three has added to uncertainties about IndusInd’s leadership and risk management.

Weak financial performance: IndusInd Bank has reported declining profits and rising provisions, which could impact its future earnings.

Market sentiment: The stock has faced significant declines, reflecting a lack of investor confidence.

Sectoral risks: As a private-sector lender, IndusInd Bank is exposed to risks such as rising non-performing assets, or bad loans, and economic slowdowns, which could further strain its performance.

From the chart below, it is evident that the trends in this counter had set off a negative domino effect in October, when IndusInd reported poor second-quarter results, which attracted some brokerage downgrades. With the fresh round of negative headwinds on its derivative portfolio, the scenario has worsened. The decline seen in the past 6 months clearly has breached important supports along the way. The IndusInd Bank stock closed Thursday at ₹672.65 per share. 

The IndusInd Bank stock has declined 65% from its highs, forcing authorities to consider if it should be retained in the benchmark Sensex and Nifty 50 indices. With growing concerns and a lack of clarity on any further course of action, investors should avoid this counter for a while.

 

Raja Venkatraman is a co-founder of NeoTrader. His Sebi-registered research analyst registration no. is INH000016223.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.