Top 7 underperforming stocks that can make you rich in 2013

The Indian markets are on a roll with the Sensex trading near 19-month highs. Equities have gained nearly 25 per cent this year in sharp contrast to a 24 per cent fall last year. The strong gains will certainly cheer up many retail investors who were disappointed at the end of the last calendar year.

The turnaround in the markets has also necessitated a re-rating in beaten-down stocks. Bank of America Merrill Lynch (BofA-ML) has come out with a report entitled The Fallen Angels  -- a reference to stocks that are likely to appeal to the contrarian investor and are long-term plays.

Under-owned, under-valued and under-performing, these ‘fallen angels’ have a pronounced bias towards rate-sensitive, economy plays, the investment bank says.

1. Jaiprakash Associates: The stock trades at 18.8 times forward prices earnings at a 53 per cent discount to its five-year average.

Why buy: The infra and cement major’s free cash flow will rise and debts will come down over FY12-15 should the company reap the full benefits of the merchant power volumes from its Karcham hydro-electric power plant, Nigrie captive coal-based project and with the start of the Bina plant in the second half of this fiscal year.

2. Infosys: The stock trades at 13.9 times forward prices earnings at a 23 per cent discount to its five-year average.

Why buy: Large and transformational deal wins are the highest ever in the past six quarters indicating that the company is regaining traction in the market. Infosys is using its Lodestone acquisition to expand offerings.

3. DLF: The stock trades at 18.9 times forward prices earnings at a 32 per cent discount to its five-year average.

Why buy: Strong operational performance to drive the stock price. A reduction in debt will be a key trigger.

BofA-ML is not positive on the following stocks, but certain triggers can go right for them.

4. State Bank of India: The stock trades at 9.1 times forward prices earnings at a 26 per cent discount to its five-year average.

What's the trigger: An improving loan to deposit ratio and re-pricing of residual bulk deposits will help margins. Asset quality improvement may lead to reduction in credit costs.

5. Reliance Industries: The stock trades at 11.7 times forward prices earnings at a 32 per cent discount to its five-year average.

What's the trigger: Better refining and petrochemical margins and positive news flow in exploration and production may drive stocks.

6. BHEL: The stock trades at 8.3 times forward prices earnings at a 55 per cent discount to its five-year average.

What's the trigger: The government's jumpstart of power capex by solving coal linkage issue and restoration of purchase preference may drive the stock.

7. Adani Enterprises: The stock trades at 7.8-times forward price earnings, which is at 67 per cent discaount to its five-year average.

What's the trigger: A reduction in power losses due to tariff hike or cheaper coal and a reduction in the group capex, especially Australia mine capex, will control leverage and drive prices.


Disclaimer: Investors are advised to make their own assessment before acting on the information.