HDFC: Time to Bank on India

12/09/2014 10:00 am EST

Focus: STOCKS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Our latest featured recommendation takes us back into an asset class whose recent performance has been underwhelming—the emerging markets—explains Nicholas Vardy, editor of Bull Market Alert.

Specifically, HDFC Bank (HDB) is one of India's largest banks. Here’s why I expect it to perform well in the coming weeks.

First, we saw a big jump in emerging market stocks across the board as the People’s Bank of China (PBOC) cut interest rates for the first time since 2012 to help shore up China’s stalling economy.

This may be just what emerging markets need to the kickstart their lagging stock markets.

Second, the Indian stock exchange has been—by far—the world’s best performer this year among all the markets I follow. Within the Indian market, the country’s private-sector banks have been doing particularly well.

Structural improvement in the governance of the country, accelerating gross domestic product, and diversified loan books mean that private sector banks are benefiting the most from the country’s economic turnaround.

Finally, HDFC Bank is one of the best ways to benefit from India’s rebound. The bank boasts strong fundamentals. It grew earnings 18% and 11% in fiscal 2013 and 2014, respectively.

The current fiscal year's earnings are expected to grow even more, by 23% in fiscal 2015 and then 24% in fiscal 2016.

Jefferies analysts have a Buy rating on HDB and have actually made it their top pick in the banking sector. Jefferies’ revised price target for HDFC Bank implies upside of roughly 12% for the stock.

So buy HDFC at the market price today and place your stop at $48.00. If you want to play the options, I recommend the January $55 calls, which last traded at $1.25 and expire Jan. 17.

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