learn how to pick value stocks
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Learn How to Pick Value StocksTRANSCRIPT
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5/29/2015 Learnhowtopickvaluestockstimesofindiaeconomictimes
http://articles.economictimes.indiatimes.com/20150518/news/62323235_1_valuetrapsvaluestocksbookvalue 1/4
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LearnhowtopickvaluestocksNarendraNathan,SanjayKumarSingh&SanketDhanorkar,ETBureau May18,2015,
10.19AMIST
Whenhypermarkets,onlineretailersandrealestatedevelopersofferdiscounts,thewholeworldgetstoknow.ButspottingadiscountonDalalStreetislessobviousandmorecomplicated.SincethetimeofBenjaminGraham,thegurusofvalueinvestinghavetriedvariouswaystoidentifystocksthataretradingatadiscounttotheiractualvalue.
Whenyoubuyasharewithatremendousgrowthpotential,youareagrowthinvestor.Valueinvestingisdifferent,andinvolvespickingoutsharesthatarepricedbelowtheirintrinsicvalue.It'sacontrarianstrategybecauseitrequiresinvestorstoembraceunlovedstocks.
"Whenyoupracticevalueinvesting,youarenotjumpingontothebandwagon.Youstandalone,"saysSankaranNaren,CIOofICICIPrudentialMutualFund.Butswimmingagainstthetidecanproveenormouslyrewardingforthesimplereasonthatyoubuygoodstocksatbeatendownprices."Sinceyoubuyatalowprice,theprobabilityoflossofcapitalislower,"saysAtulKumar,HeadofEquities,QuantumMutualFund.
Ourcoverstorythisweeklooksatthishugelysuccessfulalbeitcontrarianinvestingstrategy.Weputthe200stocksintheS&PBSE200indexthrough10filters.Withtheapplicationofeachfilter,somestocksdroppedout.Intheendwewereleftwithjust14scrips.Ofthese14stocks,wehavelookedindetailatthefundamentalsofthe10scripsmostrecommendedbyanalysts.
Valueversusprice
Thepricetoearnings(PE)andpricetobookvalue(PBV)ratiosarefavouritetoolsofvalueinvestors.ButalowPEorPBValonedoesnotmakeavaluestock.Infact,suchstockscouldwellbevaluetraps."ManyPSUbanks,leveragedenterprisesandrealestatecompaniesaretradingbelowtheirbookvalue.Theyarenotvaluestocksbutvaluetraps,"saysNileshShah,ManagingDirectorofKotakMutualFund.ThisiswhynoPSUbankmadeittoourfinallist.Ontheotherhand,aqualitystockatahighpriceisalsonotagoodinvestment.ThatiswhywehaveeliminatedallcompanieswithaPEofmorethan20andaPBVofmorethan5.
BPCL,alongwithotherpublicsectoroilmarketingcompanies,standstobenefitfromthegovernment'sdecontrolofdieselprices.Theresultantsubsidyreductiononoilproductswillreduceitsworkingcapitalrequirementanditsinterestcost.
Sinceinternationalcrudeoilpriceshavenowstabilised,thereshouldnotbeanyinventorylossesinthecomingquarters.WhatmakesBPCLunique,however,isitsexposuretoforeignupstreamoilassetsinBrazilandMozambique.
ThoughthecountersufferedwhencrudeoilpricesoftheBrentvarietycrashedfrom$115dollarsabarreltolessthan$40abarrel,therecentrecoveryishelpingBPCL.
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5/29/2015 Learnhowtopickvaluestockstimesofindiaeconomictimes
http://articles.economictimes.indiatimes.com/20150518/news/62323235_1_valuetrapsvaluestocksbookvalue 2/4
"SinceoilproductionfromassetsinBrazilandMozambiqueis23yearsaway,therecentfallincrudeoilpriceshasonlyasentimentalimpactonBPCLandthesamemaygetcorrectedduetotherecentsurgeincrudeoilprices,"saysSudeepAnand,Oil&GasAnalystatIDBICapital.
Toavoidthevaluetraps,wehaveincludedonlythosecompaniesthathaveconsistentlygeneratedprofitsinthepastfiveyears.
Notonlythat,thesecompaniesshouldhaveregisteredatleasta10%annualisedgrowthinnetprofitduringtheseyears.Wealsotookacloselookattheoperatingmarginandselectedonlythosecompanieswithapositiveoperatingmargin.Thiswastomakesurethatthenetprofitwascomingfrombusinessoperationsandwasnotextraordinaryincome.
ICICIBank,ledbyrobustgrowthincreditandbetternetinterestmargins(NIMs),reportedahealthysetofnumbersintheMarchquarter.
However,slippagesfromrestructuredloansrosehigher,evenasthenumberofloansthatwererestructuredfell.Withthemanagementexpectingstressedassetformulationinthecurrentfiscalyeartobelowerthanlastyear's,concernsonassetqualityshouldbeallayed.
Thebank,withcapitaladequacyof17%,remainsextremelywellcapitalised.Analystsinsistthatitscapitalcushionismorethanadequatetoabsorbfurtherassetqualityshocks,aswellasexploitfuturecreditgrowthopportunities.
ClytonFernandes,Analyst,EmkayGlobalFinancialServices,says,"Weexpectthebank'sprofitabilityduring201415and201617tobehealthy,ledbyrobustbusinessgrowth,betterNIMandstablecreditcosts.Aftertherecentstockpricecorrection,weupgradedourratingfromAccumulatetoBuy."
Wealsotookintoaccountthereturnoncapitalemployed(ROCE)ratioaswellasthereturnonequity(ROE)andreturnonnetworth(RONW).Thisensuredthatonlyefficientlyrunbusinessesmadethecut.Also,companieswithaveryhighlevelofdebtcanberisky.So,allcompanieswithadebtequityratioofmorethan2wereeliminated.Thegovernment'sdecisiontoallocatedomesticnaturalgastoCNGandPNGdistributorshascomeinasaboonforIndraprasthaGas.
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5/29/2015 LearnhowtopickvaluestocksPage2timesofindiaeconomictimes
http://articles.economictimes.indiatimes.com/20150518/news/62323235_1_valuetrapsvaluestocksbookvalue/2 1/4
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LearnhowtopickvaluestocksNarendraNathan,SanjayKumarSingh&SanketDhanorkar,ETBureau May18,2015,
10.19AMIST
Inadditiontothis,thefallininternationalnaturalgaspricesshouldalsoreducethecostforconsumersandtherebyrevivethecompany'svolumegrowthinthecomingyears.
WithgaspipelinesalreadylaidacrossmostofDelhi,thecompany'shighcapexphaseisalsoalmostover.
Thiswillhelpitgeneratehighfreecashflowsinthecomingyears."WithanexpectedfreecashflowofRs1,400crorebetween201415and201617,IndraprasthaGasmayalsogoforinorganicgrowthsmalleracquisitionsinthecitygasdistributionspace,"saysarecentreportbyUKbasedinvestmentbankElaraCapital.
Marginofsafety
Oneabidingprincipleofvalueinvestingistobuyastockwithamarginofsafety.Themarginofsafetyisthedifferencebetweentheintrinsicvalueofthestockandthepriceyoupayforit.IftheintrinsicvalueofastockisRs100anditisquotingatRs80,themarginofsafetyis20%.Thehigherthemarginofsafety,theloweristheriskandhigherthereturnspotential.
TheerstwhileITbellwetherisinatransformativephaseunderitsnewCEOVishalSikka.EvenasthefirmlagsbehindpeerssuchasTCSandHCLTech,SikkaaimstomakeInfosysa$20billioncompanyby2020andreturntoanaboveindustrygrowthrate.
Hisstrategyincludesheavyminingthecompany'stop100clients,withdedicatedpartnersforeach,drivingupmarginsthroughautomation,squeezinghighershareofrevenuefromservicessuchasconsulting,andacquisitions.
AnalystsareoptimisticaboutSikka'svisionoftakingInfosysawayfromitstraditionalmaintenancecentricbusinessmodeltoanextgenerationtechnologysolutionsprovider.Itscurrentvaluationsmakeitacompellingbuy,despiteweaknessinearnings.
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5/29/2015 LearnhowtopickvaluestocksPage2timesofindiaeconomictimes
http://articles.economictimes.indiatimes.com/20150518/news/62323235_1_valuetrapsvaluestocksbookvalue/2 2/4
SarabjitKaurNangra,Analyst,AngelBroking,says,"Thestockischeapatcurrentvaluations,tradingatadiscounttoitspeerssuchasTCS.WebelievethegapinvaluationcannarrowdownoncegrowthpicksupatInfosys."
Asmentionedearlier,evenagoodstockatahighpriceisariskyinvestment.Duringbullruns,investorscangetswayedbyirrationalexuberance.In2000,SatyamComputerwastradingataPEof200.ManyinvestorsjustifiedthisvaluationbycitingInfosys'PEof400.LICHousingFinanceisadominantplayerinthemortgagefinancesegment.Since200607,thecompanyhasincreaseditsloanbookatmorethan25%compoundannualgrowthratecomparedtoindustryaverageofaround1517%.
Itsmarketshare,atnearly10%,hasalmostdoubledinthelastsevenyears.Disbursementshavebeenlargelydrivenbyindividualborrowersasegmentwhichwillsupportaloanbookgrowthofaround20%overthenextthreeyears.
Assetqualityalsoremainshealthy.Analystsseeimprovementinmarginsasinterestratescomedownduetoanenhancedfocusonhighyieldingdeveloperloans.
"Beingaleadplayerinthehousingfinancespacewithmarginimprovementtriggers,thecompanystandstobenefitfromthefavourableinterestratecycle,whichwillresultinhigherearningsvisibilityandsuperiorreturnratios,"saysKunalShah,Analyst,EdelweissSecurities.
SaysSanjayBakshi,AdjunctProfessorattheManagementDevelopmentInstitute,Gurgaon:"Youcan'tjustifybuyinganovervaluedstockjustbecauseotherscripsinthesectoraretradingatevenhighervaluations."Ontheotherhand,ifyoubuyanundervaluedstock,younotonlyreducetheriskbutenhanceyourchancesofearninghigherreturns.M&MFinancialServices,forthepastseveralyears,hasbeengoingthroughabadpatch.Whiletheslowdownincommercialvehiclesaleswasthetriggerforanearliercorrection,fearofapoormonsoonisdraggingthecounternow.
However,analystsfeelwhilethecyclicalstresshasimpacteditsprofitability,theinherentbusinessmodelisstillrobustand,therefore,thecompanywillbouncebackwhentheruraleconomystartsturningaround.
ThatiswhyRajivMehtaofIIFLIndiabelievesthecurrentvaluationlevelsprovideanaccumulationopportunity.
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5/29/2015 LearnhowtopickvaluestocksPage2timesofindiaeconomictimes
http://articles.economictimes.indiatimes.com/20150518/news/62323235_1_valuetrapsvaluestocksbookvalue/2 3/4
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"By201617,weexpectRoA(returnonasset)toimproveto3.2%andRoE(returnonequity)toimproveto20%,underpinnedbyaccelerationinassetgrowth,recoveryinNIMsandmoderationincreditcost,"hesays.
Mostinvestorsdon'tbuyastockforitsdividends.Evenso,theperiodicpaymentofdividendstoshareholdersisagoodindicatorofthecompany'sfinancialsoundness.What'smore,thedividendyield(whichisthedividendasapercentageoftheshareprice)ishighenough,itlendsamarginofsafetytothestock.
NMDC,becauseofthedrasticfallininternationalcommoditypricesandasluggishdemandfromdomesticsteelmills,hasbeenforcedtoreduceironorepricesinrecentmonths.
Thisistoensurethatsteelmillsdonotcontinuetorelyonimportstoavailofhighquality,lowcost,ore.
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5/29/2015 LearnhowtopickvaluestocksPage3timesofindiaeconomictimes
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LearnhowtopickvaluestocksNarendraNathan,SanjayKumarSingh&SanketDhanorkar,ETBureau May18,2015,
10.19AMIST
PricecuthasledtoasteadydeclineinNMDC'sstockprice,anditisnowemergingasagoodvaluepick,giventhatitcontinuestogrowitsshareinthecountry'sironoreproductionatasteadypace.
Also,beingthecheapestproducer,itboastsofthehighestoperatingmarginsinthesector.Ithasalsoembarkedonvalueadditionprojectsbysettinguppelletisationplantsaswellasa3milliontonneperannumultramegasteelplantinChhattisgarh.
Inourstudy,wehaveincludedcompaniesthathaveconsistentlypaiddividendsforthepastfiveyears.Also,thedividendpayout(whichisthedividendasapercentageoftheearningspershare)shouldhavebeenatleast10%oftheprofitineachofthefiveyears.
TheIndiandemandisexpectedtopickupsignificantlyduetolowerliquefiednaturalgas(LNG)pricesandthisshouldhelptoimprovePetronetLNG'smargininthecomingquarters.
However,thecounterisunderpressurenowbecauseofitshighcost,longtermLNGpurchasingcontract.Analysts,though,arehopefulthatthisproblemwillgetsolvedsoon.
"PetronetLNGhasbacktobackcontractswiththegasdistributorsGAIL,BPCLandIOCandPetronetLNGexpectsthemtohonourthosecontracts,"saysSudeepAnand,Oil&GasAnalystatIDBICapital.
So,investorsshouldusethecurrentcorrectioninthecounterforlongtermaccumulation.
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5/29/2015 LearnhowtopickvaluestocksPage3timesofindiaeconomictimes
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Valueversusgrowth
Thoughvalueinvestingcanyieldhandsomereturns,ithasnotdonetoowellinthepastsixyears.Inarecentreport,MumbaibasedPhillipsCapitalpointsoutthatvalueinvestingdoesnotworkwheninvestorsentimentisdown.Between2009and2015,whentheslowdownintheGDPgrowthstalledprojectsandhyperinflationdampenedinvestorsentiment,theMSCIIndiaValueindexunderperformedtheMSCIIndiaGrowthindexbyalmost300basispoints.
However,PhillipsCapitalalsonotesthatthisissettochangebecausetheeconomyisnowgettingbackontrackandinvestorsarewillingtotakemorerisks.
TheongoingpowersectorreformsinitiatedbythegovernmentbodewellforfinancierRuralElectrificationCorporation(REC).Whilethefinancialviabilityofstateelectricityboardsisimprovingwiththeirrestructuring,stepstakenbythegovernmenttowardsaugmentingfuelsupplyarealsoencouraging.
REC'scompetitivepositionremainsstronginthepowerfinancingspace,supportedbyitsnodalagencystatus,abilitytolendforlongertenures,andthebenefitoflowerfundingcost.
ItsNIMhassignificantlyimprovedoverthepastfewyears,aidedbyastrengthenedpricingpowerandhighershareofprivatesectorgeneration.
AkshayDalmia,Analyst,IIFL,says,"Thecompanyislikelytowitnessapickupindisbursementsandassetgrowthoverthecomingthreeyears.ItwoulddeliverRoAofabove3%andRoEinexcessof20%inthelongerrun."
Thebrokeragehasallocatedalmost36%ofitsmodelportfoliotovaluestocks."Asweexpecttheonsetofacapacitycreationphase,valueinvestingwillsoonbecomethedominantinvestmentstrategy,"itconcludes.
Despitebeingoneofthefastgrowingbanksitsnetprofithasgrownatanannualisedrateof41%inthelastfiveyearsitisstillquotingatreasonablevaluations.
YesBankisnowfocussingontheretailsegmentand,givenitsrelativelylowshare,thisshouldbeitsnextgrowthengine.
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5/29/2015 LearnhowtopickvaluestocksPage3timesofindiaeconomictimes
http://articles.economictimes.indiatimes.com/20150518/news/62323235_1_valuetrapsvaluestocksbookvalue/3 3/5
Duetohigherinterestrateofferedbythebankonitssavingsaccounts,itsCASA(currentandsavingsaccount)fundingbaseisalsobeenimprovingovertheyears,helpingthebankbringdownitscostoffunds.
Duetoincreasedreachandsofteninginterestratestructure,itsNIMshouldimprovefurtherfromthecurrent3.2%.
Whatnottoexpect
Afewcaveatsforinvestors.Valueinvestingisanothernameforpatientinvesting.Don'texpectfireworksfromyourvaluepicks."Valueinvestingreducesthedownsiderisktosomeextentbutvaluestocksalsotaketimetoappreciate.Thestocksmayremainatadiscountforaprolongedtime,"warnsDineshThakkar,ChairmanandManagingDirector,AngelBroking.
Thenagain,youneedtoholdthesestocksforthelongtermtobeabletogetthebestreturns.WarrenBuffett,arguablythemostsuccessfulvalueinvestorofalltime,isstillholdingstockshebought3040yearsago.Buffettsayshisfavouriteholdingperiodis"forever".Whilewedonotagreewiththisphilosophyofinvestinginperpetuity,thestockswehaveshortlistedforyoucouldoffergoodreturnsoverthenext810years.Happy(value)investing.
HOWWEDIDIT
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5/29/2015 LearnhowtopickvaluestocksPage3timesofindiaeconomictimes
http://articles.economictimes.indiatimes.com/20150518/news/62323235_1_valuetrapsvaluestocksbookvalue/3 4/5
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Here'showweapplied10filterstoidentifyvaluestocksfromtheBSE200universe.
1.Westartedwiththe200stocksintheS&PBSE200index.Sinceitisalargecapindex,smallandmidcapstocksgeteliminated2.Toavoidvaluetraps,onlycompaniesthatmadeprofitsduringthepastfiveyearswereconsidered29companiesfellout,leavingonly171stocks.
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LearnhowtopickvaluestocksNarendraNathan,SanjayKumarSingh&SanketDhanorkar,ETBureau May18,2015,
10.19AMIST
3.Oftheseprofitablecompanies,onlythosewithatleast10%annualisednetprofitgrowthwereconsidered67companiesfellout,leavingonly104stocks.
4.Next,onlycompanieswithpositiveoperatingmarginwereretainedtoensurethatthenetprofitisfrombusinessoperationsandnotfromotherincomes1stockmovedout,leaving103stocks.
5.Whileprofitsaregood,theymustjustifytheinvestmentinthebusiness.Onlystockswithatleast10%ROCEwerekept8companiesfellthrough,leavinguswith95stocks.
6.Also,theRONWshouldbeatleast15%toensurethatonlycompaniesgeneratingenoughprofitsareconsidered.17companiesmovedout,leavingonly78stocks.
7.Thenextfilterwasadebttoequityratiooflessthan2.Noneofthecompanieshadadebtequityratioofmorethan2soall78stocksremained.
8.Next,onlystocksthatpaiddividendsinthepastfiveyearsanddistributedatleast10%oftheirprofitsasdividendwerekept20companiesfellout,leavinguswith58stocks.
9.Agoodcompanycanbeabadbuyatahighprice.StockswithaPEofover20werekeptout40highpricedstocksfellout,leavinguswith18stocks.
10.Anothervaluationmetricisthepricetobookvalue(PBV).ThePBVcanvarygreatly,sowekeptaliberalcutoffof5.Threecompaniesgotdropped,leavinguswith15stocks.
11.Lastly,onlystockswithadividendyieldofatleast1%wereconsidered.Onecompanymovedout.Leavinguswith14valuepicks.
Ofthese,wehaveanalysed10stocksforyouindetail.These10stockshavebeenchosenonthebasisofanalysts'recommendations.
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Stocksatmultiyearlowprices:Bargainbuysorvalue...August19,2013
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CorporateDossier
Microsoft,CiscobidgoodbyetomuchhatedappraisaltoolThemainfeatureofMS'snewsystemiscontinuousfeedback.Theappraiser&appraiseearerequiredto'connect'fourtimeseveryyear.
CanTantisteerSuzlontowardsgrowthafteraneardeathexperience?Whoshouldchangeourhabitstheleaderorthefollower?
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AndroidM:10thingsGoogle'slatestAndroidOScandoGooglehastakenthewrapsoffitslatestAndroidOS,thesuccessortoLollipop.M,willboastnewwaystofetchinformation.
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