BPCL, SBI & Tata Power Likely to Shine on Quants’ Buying List
Stocks where the gap between the current and average price earnings (PE) multiple have widened significantly are likely to see less movement after the recent run, as many quantitative traders who place a bet based on valuation bands may lighten their positions.
As a result, stocks such as Ambuja Cements, Bhel, UltraTech and ONGC — trading two standard deviations away from their respective average PEs — may be most susceptible to a correction.
As opposed to this, traders may show interest in stocks such as BPCL, SBI and Tata Power which have traded below two standard deviations and offer favourable risk-reward. The Nifty is trading 6% below its long-term average PE. Based on the valuation band, the next leg of the Nifty direction will depend upon how traders’ interest emerges in Adani Ports, HDFC, HDFC Bank, TCS and Tata Motors where there’s a fair amount of earnings visibility, but the stocks are trading closer to one standard deviation below average.
Standard deviation is a statistical term which tells how much the current data is away from its mean. Quantitative traders typically work on the premise that if a security is trading away from the mean (on either side), it has a tendency to come closer to the average (mean) level, if all other things remain constant.
Of the 50 stocks in Nifty, six are trading higher than two standard deviations and 11 are trading above their one standard deviation. At the same time, 19 stocks are trading closer to their average valuations, 11 are trading between negative one and average valuation, and three are below their two standard deviations.
ET Intelligence group