5 fundamentally strong, non-speculative stocks worth investing in

Broadly, stock market players can be classified as speculators and investors. Speculators put in money for the short-term. The category includes day traders who frequently buy or sell stocks and aim to square-off their positions intra-day. Speculators try to profit from news-based stock price movements and short-term price signals based on the technical indicators. Investors, however, are generally long-term players who buy stocks based on companies’ fundamentals and hold them for longer periods. Activity of speculators and investors help determine speculative and non-speculative stocks.

Average percentage delivery quantity is the metric generally used to differentiate between speculative and non-speculative stocks. It shows the number of investors who are willing to accept the stocks in their demat account. If the total traded quantity of a stock is 500 and the deliverable quantity is 300, it means 200 shares were traded intra-day. The delivery percentage quantity in this case will be 60%. Stocks with high delivery percentage quantity are considered non-speculative and those with low delivery percentage quantity are considered speculative stocks. This metric when combined with the stock price provides an idea of the short-term stock price movements.

We tried to identify non-speculative stocks by analysing companies with market-cap greater than Rs 1,000 crore. We determined the average delivery percentage quantity and the average delivery volume of these 760 stocks over the past six months, one year and three years, using ACE Equity database. Stocks whose average delivery percentage quantity was greater than 51% across the above defined time frames were filtered. We then identified stocks whose average delivery volumes were greater than 10,000 shares across the specified time periods. Finally, two additional filters were applied to select stocks covered by at least five Bloomberg analysts and those with one year forward price potential of more than 10%.

Only 13 stocks passed all our filters. The total net worth of these 13 companies has risen more than 60% between 2014-15 and 2017-18. Their average return on capital employed improved from 24.8% to 26.2% during this period. Let’s look at five of these stocks whose recent analyst research reports are available:

These stocks have strong fundamentals
Analysts expect this portfolio of stocks to deliver over 30% return in one year.

*AnandRathi estimates. Stock prices as on 21 May 2019. Source: ACE Equity and Bloomberg.

1. Varroc Engineering
An auto component manufacturer, Varroc supplies auto products for passenger cars, commercial vehicles, two-wheelers, three-wheelers and off-highway vehicles. Analysts believe that the stock is well-positioned to command premium valuations. Its global market share if growing, R&D facilities are robust, share of LEDs in global auto lighting is rising, and expansion of Brazil, Morocco and Poland plants has happened earlier than was planned. The company is also aiming to increase its presence in the Japanese and Korean OEMs.

2. Music Broadcast
It operates FM radio under the Radio City brand and has 39 radio and 52 Web stations. Analysts believe that recovery in advertising, lower capex requirement, long-term broadcast licensing, better pricing at legacy stations, rising inventory utilisation and improved operating leverage will boost the company’s profitability.

3. Dalmia Bharat
This cement manufacturer with plants in Tamil Nadu and Andhra Pradesh has a capacity of nine million tonnes per annum. AnandRathi is optimistic about Dalmia’s prospects due to its increasing share of premium products and improved capacity expansion. In addition, the amalgamation with Odisha Cement will result in tax savings because of higher depreciation and a simplified corporate structure.

4. Essel Propack
A specialty packaging company, Essel Propack manufactures laminated plastic tubes and caters to the FMCG and pharma segments. According to a research report by Systematix group, its sales in the American region are likely to maintain strong growth momentum due to the addition of new customers and increased business from the existing clients. Moreover, the growth trend in the EU provides further scope for margin improvement. The other trigger is the Blackstone acquisition which will bring-in customers, revenue synergies, access to the fund’s global network of experts, capital for acquisitions/expansion and cost efficiency expertise.

5. Gujarat Gas
This distributor of natural gas in the industrial, commercial, domestic and automobile (CNG) segments has a significant share in the city gas distribution market. According to a report by Deutsche Bank, the ramp-up in new areas of Jamnagar, Bhavnagar, Kutch, Botad, Dahej, Thane and Silvasa will support the company’s long-term volume growth. The brokerage expects that the rising CNG penetration and an industrial revival will ensure a 9% volume CAGR, 19% Ebitda CAGR and 40% EPS CAGR between 2017-18 and 2019-20.