As Buffett starts buying stocks, D-Street analysts wonder if they should go top-down or bottom-up

NEW DELHI: Investing legend Warren Buffett's Berkshire Hathaway surprised many by reporting a $9.7 billion asset buy in Dominion Energy and an additional $800 million share purchase in Bank of America last month.

Warren Buffett had been criticised for some time now for not making use of the $137 billion in cash pile that Berkshire Hathaway was sitting on, as the stock market rallied from the March lows. The Oracle of Omaha – as he is often referred to as -- does not fall to FOMO (fear of missing out) and takes his decisions carefully, say his ardent followers.

And that should be cue for other investors as well, they insist. As Buffett says: “You do things when the opportunities come along.”

BSE Sensex is up 45 per cent from its March low. Marketmen say while the domestic indices look richly valued at this point, there do exist pockets of stocks with reasonable valuations.

“One just needs to do a bit of cherry-picking, as Buffett does,” the analysts said.

“I've had periods in my life when I’ve had a bundle of ideas come along, and then I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing," Buffett once said.

Gaurav Sud, an IITian-turned-value investor, said the US Fed made a slew of big announcements in March, which all-off-a-sudden changed the market momentum in March. But Buffett did not see any attractive opportunity there.

At the 55th AGM at Berkshire Hathaway in May, Buffett said he considered making a few deals, but the Fed's unprecedented stimulus efforts faded the appeal of such opportunities.

At the same AGM, he sounded worried over the wide range of economic possibilities arising out of coronavirus. He warned investors not to get in a position, so much so that market disruptions can affect them badly. Because one tends to be either leveraged or are psychologically unable to absorb bad news. That said, he reiterated “nothing can basically stop America.”

"It is only now that there is consensus building up that the Covid-19 vaccine is around the corner. This might have eased the legendary investor's apprehensions over the worst case scenario,” Sud said.

About Indian stocks, Sud said after the recent rally, the valuations are surely expensive in certain pockets, but there are also parts which are inexpensive. “The key is to be able to cherry-pick stocks,” he said.

About Buffett's fresh buys, analysts noted banking is one space which has not seen recovery globally from March lows and Bank of America is not different.

Shares of Bank of America are down 29 per cent year to date, while those of natural gas player Dominion are flat in the same period and down 10 per cent from March highs.

In India, no Nifty50 companies delivered any big negative surprise in June quarter earnings. “Most either beat estimates or were in a neutral zone,” said ICICI Securities.

“This reading makes us more confident of our earlier argument that given the sharpest cuts to forward earnings since the Global Financial Crisis, the over-estimation in earnings seen since FY14 will reduce going ahead,” the brokerage said.

Kotak Securities sees value in Axis Bank, Hindalco, ITC, L&T, Mindtree, Petronet LNG, PNC Infratech and Voltas..

"The wider-than-usual dispersion in valuations between growth and value stocks and contribution of few stocks to the market recovery have made it difficult to take a top-down approach. One needs to have a bottoms-up approach for stock selection,” said Kotak Securities.

Emkay Global has listed Aurobindo Pharma, Airtel, Britannia, HDFC Bank, Infosys, NTPC and UPL among its largecap high-conviction stocks. It also likes Birla Corp., Escorts, Granules India, Persistent Systems and Varun Beverages, among its small and midcap ideas.

“Indian market breadth has been in the bear phase since 2018. It is quite a long bear market, considering that the longest one in last two decades (during Global Financial Crisis) lasted about 15 months. If you look at March prices, they marked the bottom of the market in terms of valuations. If that is the case, then we are just three months into the recovery. We could not be so worried about 5-10 per cent correction,” said Ravi Dharamshi, CIO, ValueQuest Investment Advisors.