Humpty, Dumpty stocks that are set for a fall: Dipan Mehta

A correction will remove a lot of froth from the market. We can resume the multi-year bull market a few weeks down the line, says Dipan Mehta, Director, Elixir Equities.

Two days on the trot, we have seen a selloff. The broader market selloff is also very much in focus. We are not going to see the upgrades we got used to in the last earning season also.
What we are seeing is some of the steam being let off in the market. We had seen a significant climb over the last several weeks and what we are witnessing just now is a minor correction. Investors are getting a bit cautious on account of two reasons. One is the earning season. The stocks having rallied into the earning season, maybe some of the savvy investors want to be a bit light because one never really knows what is coming out of the corporate earnings or what management has to say. So it is always good for the market to go a little light into the earning season as expectations are kept in check.

Then there is the liquidity aspect. Negative numbers coming from FIIs and domestic investors have dampened the sentiment and retail investors are also looking forward to huge offerings in the IPO market. Some amount of cash flow planning is needed on account of the applications which they want to make for new IPOs. These are the confluence of factors which are resulting in a minor correction.

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It is fine because some correction will remove a lot of froth from the market. We can resume the multi-year bull market a few weeks down the line.

According to you what are the Humpty Dumpties in the market now?
Any stock which is quoting at a 100 plus PE multiple and a few names that come to mind are DMart, InfoEdge, something like a Zomato, even Asian Paints, Astral Poly. These are extremely richly valued stocks and even a minor disappointment over there can lead to a correction.

In the stock market, the prices are always ahead of the earnings and the earnings are coming through. So what you may see over the next three to six months would be a gradual compression of the price to earnings multiple because earnings for the entire sector and the index will keep on moving up higher and higher partly because of a better economy and stock prices may remain stable or correct so you may see a compression of price to earnings multiple and that in itself may make the market quite safe.

At any point of time between now and maybe early 2022, we should expect a 10-15% correction. It is long overdue. It does happen in bull markets. We do not know the reasons why but something will trigger a correction and those are good entry points. When I am looking at buying a stock, even if it has run up a lot, one can just wait for the earnings to catch up and get into it when one is comfortable with the price to earnings multiple. That kind of a situation is coming in the next two, three months or so.