BPCL, SBI & Tata Power Likely to Shine on Quants’ Buy­ing List

The Economic Times - - Diruption: -

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

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