Avoid railways but definitely buy defence stocks: Gautam Shah

“So, I think the recent breakout was genuine and I do believe that the banks can lead the market higher from current levels. In fact, our working target on the Bank Nifty is about 47,500 to 48,000,” says Gautam Shah, Goldilocks Premium.

What happens to banks now? In the pure play banking space can HDFC Bank now do the magic considering it is a behemoth and a combined entity soon or do you think there is any other banking stock which is going to show leadership?
See, a month back, there was this concern that the Nifty was going up and banks were not participating. Remember that six-week period wherein the Bank Nifty was absolutely flat and thereafter, once that 44,000 number got taken out and the way some of these top banks including HDFC Bank which just rebounded from the 200-day exponential moving average, it told you that it was just a resting phase before the next move up. So, I think the recent breakout was genuine and I do believe that the banks can lead the market higher from current levels. In fact, our working target on the Bank Nifty is about 47,500 to 48,000.

There is a bit of a bump around that 45,500 number. Once that gets cleared, I think there is no looking back. And because it is covering up for three months of underperformance, the scope is huge. So, I think we actually love SBI. We like the way ICICI Bank is placed at this point and HDFC Bank I think pretty much is a no-brainer. It will take time. It will not give you momentum but definitely gives stability to your portfolio.

Financials itself, do you have a preference over PSU versus private?
See, of late, I think we believe that the PSU theme is huge. It has played out beautifully over the last six months and it is going to get bigger and bigger. I think we have all seen what HAL, the PFCs, the RECs, the BELs of the world have done, Coal India, NTPC, Power Grid, we like all of these stocks.

I think as a basket, we feel that over the next six months, there is going to be a lot of upside. But the recent trend that I have noticed in the last one week is the comeback of PSU banks. So, I think SBI, Canara Bank, BOB definitely fit the bill and I think there could be a trading opportunity there. I am not very sure from a buy and hold perspective, but definitely a trade is there for the next two to three months.

What happens to IT? Does it continue to get slapped around and weigh heavy on the markets?
I am quite optimistic to be honest. I just feel when I look at the ratio charts which is IT index divided by the Nifty, it is at a 10-year low. So, it just tells you that we are at an inflection point. Either it moves big from here, it sees a mega turnaround and does well over the next 6 to 12 months which is actually my view or if the breakdown happens on account of average or below average results, that would be a big concern. But the way we study the charts, I think the downside potential is 5% and the upside potential is 20% for most of the top large-cap IT stocks. So, with a 1:4 kind of a risk reward, at a 19,400-19,500 index IT is a buy from an investment perspective.

What is your view in this entire fight of midcaps versus large caps? Midcaps had done quite well over the last couple of months, but now large caps are also participating. If you had to take a pick, large cap versus midcap, what would you pick?
Well, as a technician, it is very easy. I will just pick midcaps and small caps over the large caps because we love using the ratio charts and if you do a midcap index divided by the Nifty, you will see that that chart is upward sloping and there is room for a lot more upside.

So, I think for the rest of this year, I do have great visibility for the midcaps and small caps and I think they will continue to run. In fact, I am reminded of the 2017 and 2007 period, wherein in those years, if you remember the index did nothing and stocks just continued to move higher the entire year.

2023 for midcaps and small caps is looking something like that. So, the market on an index level will keep scaring you from time to time and anyway the valuations some people say are a little extended which I think is a fair argument.

But midcaps and small caps have a lot of room because in the last two years the damage was huge and I think they were under-owned. So, there is going to be a lot of money flowing in there.

What about the entire defence and railway sector? Are those stocks getting a little overheated?
I think railway is definitely overdone, so I would not be looking that at these prices. In fact, our recommendation is to take profits in the railway stocks. But defence is a very big theme. Defence is the theme for the next three to five years, so I do not think that is going anywhere soon. So, I think stocks like HAL definitely fit the bill even at current levels. Just be careful in terms of your timing because it is more from a long-term perspective. So in a nutshell, avoid railway but definitely buy defence.