HOW TO FIND VALUE STOCKS...............
They are believed to carry hidden treasure on Dalal Street. While
investors call them the low-lying unpolished gems of the stock-
market, brokers say there are big bucks to be made if you can
identify these stocks early. No prizes for guessing this, we are
talking about deep value stocks which can do wonders to one's
portfolio when market re-assesses them.
According to analysts, a deep value stock can be defined as something
which is low priced in relation to the margin of safety the stock
provides, to limit losses when a mistake is made. SundayET provides
you an insight into how to identify these stocks, what should be your
ideal portfolio allocation and reasons behind their low valuations in
the market.
Sleeping giants
They are like any other stock traded on the exchange, but there is no
hypothetical understanding of them. A section of traders on the
Bombay Stock Exchange even call these stocks as `sleeping giants'.
Manish Sonthalia, vice-president, equity strategy, Motilal Oswal
Securities, believes that there are two ways in which you can
identify a deep value stock.
First, what Benjamin Graham recommends for the defensive investors in
his 1949 classic, that the stock price should not be more than 15
times its average earnings per share over the past three years and
the overall PE of the portfolio should not be more than 13. Or
second, the stock should be trading below its 10-year median PE.
"The other things to be kept in mind is to stick with companies that
have a long history of consistent profit growth and steady dividend
payouts and the fact that not every cheap stock would turn out to be
a bargain," says Sonthalia.
He believes that PSU banks like Oriental Bank of Commerce, which is
trading at a PE of 5.6 with book value of Rs 240 for FY09, is a
perfect example of a deep value stock. "In a growing economy like
India, banks should do well as the GDP expands," he reasons.
According to Ketan Karani, vice-president, research, Kotak
Securities, these stocks generally remain neglected by the stock
markets. "The best (or you may call it worst) part is that people
know it's a great story but still they don't want to touch it. If one
saw the real estate boom in India five years back and bought into
Unitech, his portfolio returns would have multiplied phenomenally,"
he sums up.
As far as portfolio allocations are concerned, analysts feel that an
investor could invest 80% in growth stocks and 20% in value stocks
(after keeping some cash balance or investments in fixed income
instruments). In case of a pure deep value investor, Sonthalia says
that typically 80% the investment of investible funds should be in
these stocks and 20% of the funds should be kept aside for fixed
income instruments or cash balance.
"However, a hybrid investor should follow a strategy in between the
two. The basic principle followed is the Pareto's principle, the
80/20 rule," he points out.
Sow to reap
Though opinions differ on an ideal investment horizon, most analysts
agree that it should not be less than a year and which could extend
up to three to five years to reap big dividends. Karani says the
first thing an investor needs to do is to ask himself whether he is a
speculator or an investor.
If he is a speculator, then there is no chance for him to stay in
these stocks. If he is an investor, a time period of three to five
years is what makes sense," he feels. However, if the stock does not
give the required return even after holding for three years, there is
something more than one`s own understanding about the stock.
"In such a scenario, you could sell the stock and move to something
else. However, if there are compelling reasons, you could continue
holding the stock," says Sonthalia. On why these stocks have
ridiculously low valuations, Karani says that "the market sometimes
tends to overlook an industry. And usually these stocks are not
popular with brokers."
Apart from that, analysts explain that there could be reasons such as
high transaction impact costs (small caps can have transaction impact
costs as high as 30-50% ) and fear of uncertain events or adverse
macro environment conditions such as rise in oil and interest rates,
government policies, etc.
"You must also understand that fear always resides in the near term.
And that's why there is lower visibility of the future even though
the broad picture remains intact in these cases," he says.
They are believed to carry hidden treasure on Dalal Street. While
investors call them the low-lying unpolished gems of the stock-
market, brokers say there are big bucks to be made if you can
identify these stocks early. No prizes for guessing this, we are
talking about deep value stocks which can do wonders to one's
portfolio when market re-assesses them.
According to analysts, a deep value stock can be defined as something
which is low priced in relation to the margin of safety the stock
provides, to limit losses when a mistake is made. SundayET provides
you an insight into how to identify these stocks, what should be your
ideal portfolio allocation and reasons behind their low valuations in
the market.
Sleeping giants
They are like any other stock traded on the exchange, but there is no
hypothetical understanding of them. A section of traders on the
Bombay Stock Exchange even call these stocks as `sleeping giants'.
Manish Sonthalia, vice-president, equity strategy, Motilal Oswal
Securities, believes that there are two ways in which you can
identify a deep value stock.
First, what Benjamin Graham recommends for the defensive investors in
his 1949 classic, that the stock price should not be more than 15
times its average earnings per share over the past three years and
the overall PE of the portfolio should not be more than 13. Or
second, the stock should be trading below its 10-year median PE.
"The other things to be kept in mind is to stick with companies that
have a long history of consistent profit growth and steady dividend
payouts and the fact that not every cheap stock would turn out to be
a bargain," says Sonthalia.
He believes that PSU banks like Oriental Bank of Commerce, which is
trading at a PE of 5.6 with book value of Rs 240 for FY09, is a
perfect example of a deep value stock. "In a growing economy like
India, banks should do well as the GDP expands," he reasons.
According to Ketan Karani, vice-president, research, Kotak
Securities, these stocks generally remain neglected by the stock
markets. "The best (or you may call it worst) part is that people
know it's a great story but still they don't want to touch it. If one
saw the real estate boom in India five years back and bought into
Unitech, his portfolio returns would have multiplied phenomenally,"
he sums up.
As far as portfolio allocations are concerned, analysts feel that an
investor could invest 80% in growth stocks and 20% in value stocks
(after keeping some cash balance or investments in fixed income
instruments). In case of a pure deep value investor, Sonthalia says
that typically 80% the investment of investible funds should be in
these stocks and 20% of the funds should be kept aside for fixed
income instruments or cash balance.
"However, a hybrid investor should follow a strategy in between the
two. The basic principle followed is the Pareto's principle, the
80/20 rule," he points out.
Sow to reap
Though opinions differ on an ideal investment horizon, most analysts
agree that it should not be less than a year and which could extend
up to three to five years to reap big dividends. Karani says the
first thing an investor needs to do is to ask himself whether he is a
speculator or an investor.
If he is a speculator, then there is no chance for him to stay in
these stocks. If he is an investor, a time period of three to five
years is what makes sense," he feels. However, if the stock does not
give the required return even after holding for three years, there is
something more than one`s own understanding about the stock.
"In such a scenario, you could sell the stock and move to something
else. However, if there are compelling reasons, you could continue
holding the stock," says Sonthalia. On why these stocks have
ridiculously low valuations, Karani says that "the market sometimes
tends to overlook an industry. And usually these stocks are not
popular with brokers."
Apart from that, analysts explain that there could be reasons such as
high transaction impact costs (small caps can have transaction impact
costs as high as 30-50% ) and fear of uncertain events or adverse
macro environment conditions such as rise in oil and interest rates,
government policies, etc.
"You must also understand that fear always resides in the near term.
And that's why there is lower visibility of the future even though
the broad picture remains intact in these cases," he says.
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