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Tags: value stocks 0 Tweet 0 Recommend S S Learn how to pick value stocks Narendra Nathan, Sanjay Kumar Singh & Sanket Dhanorkar, ET Bureau May 18, 2015, 10.19AM IST When hypermarkets, online retailers and real estate developers offer discounts, the whole world gets to know. But spotting a discount on Dalal Street is less obvious and more complicated. Since the time of Benjamin Graham, the gurus of value investing have tried various ways to identify stocks that are trading at a discount to their actual value. When you buy a share with a tremendous growth potential, you are a growth investor. Value investing is different, and involves picking out shares that are priced below their intrinsic value. It's a contrarian strategy because it requires investors to embrace unloved stocks. "When you practice value investing, you are not jumping on to the bandwagon. You stand alone," says Sankaran Naren, CIO of ICICI Prudential Mutual Fund. But swimming against the tide can prove enormously rewarding for the simple reason that you buy good stocks at beaten down prices. "Since you buy at a low price, the probability of loss of capital is lower," says Atul Kumar, Head of Equities, Quantum Mutual Fund. Our cover story this week looks at this hugely successful albeit contrarian investing strategy. We put the 200 stocks in the S&P BSE 200 index through 10 filters. With the application of each filter, some stocks dropped out. In the end we were left with just 14 scrips. Of these 14 stocks, we have looked in detail at the fundamentals of the 10 scrips most recommended by analysts. Value versus price The pricetoearnings (PE) and pricetobook value (PBV) ratios are favourite tools of value investors. But a low PE or PBV alone does not make a value stock. In fact, such stocks could well be value traps. "Many PSU banks, leveraged enterprises and real estate companies are trading below their book value. They are not value stocks but value traps," says Nilesh Shah, Managing Director of Kotak Mutual Fund. This is why no PSU bank made it to our final list. On the other hand, a quality stock at a high price is also not a good investment. That is why we have eliminated all companies with a PE of more than 20 and a PBV of more than 5. BPCL, along with other public sector oil marketing companies, stands to benefit from the government's decontrol of diesel prices. The resultant subsidy reduction on oil products will reduce its working capital requirement and its interest cost. Since international crude oil prices have now stabilised, there should not be any inventory losses in the coming quarters. What makes BPCL unique, however, is its exposure to foreign upstream oil assets—in Brazil and Mozambique. Though the counter suffered when crude oil prices of the Brent variety crashed from $115 dollars a barrel to less than $40 a barrel, the recent recovery is helping BPCL. RELATED ARTICLES Stocks at multiyear low prices: Bargain buys or value... August 19, 2013 Value investing: Pick stocks after analysis March 8, 2009 How to buy stocks in an overbought market February 27, 2012 INDEPTH COVERAGE Book Value Fringe parivar? Ten most aggressive fringe elements of the Parivar From the wellknown VHP to the littleknown Hindu Makkal Katchi, created their own peculiar and occasionally disturbing narrative. The uneasy truce between PM Modi & RSS chief Bhagwat How RSS has grown in the first year of Modi government SPOTLIGHT FOLLOW ET: Log In / Join News News Recos Earnings Announcements Policy Market Calendar Stock Price Quotes SENSEX 27,531.41 112.47 NIFTY 8,339.35 30.90 GOLD (MCX) (Rs/10g.) 26,905.00 256.00 USD/INR 63.98 0.41 LOGIN to Track your Investments 04:05 PM | 26 May market stats EOD Home Markets Stocks IPOs/FPOs Market Stats Live Technicals Commodities Forex Bonds Definitions Stock Game Indiatimes The Times of India The Economic Times More You are here: Home > Collections > Book Value (Buying stocks that are trading…)

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  • 5/29/2015 Learnhowtopickvaluestockstimesofindiaeconomictimes

    http://articles.economictimes.indiatimes.com/20150518/news/62323235_1_valuetrapsvaluestocksbookvalue 1/4

    Tags: valuestocks

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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.

    RELATEDARTICLES

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    Valueinvesting:PickstocksafteranalysisMarch8,2009

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    Fringeparivar?

    TenmostaggressivefringeelementsoftheParivarFromthewellknownVHPtothelittleknownHinduMakkalKatchi,createdtheirownpeculiarandoccasionallydisturbingnarrative.

    TheuneasytrucebetweenPMModi&RSSchiefBhagwatHowRSShasgrowninthefirstyearofModigovernment

    Defenceaerospace

    AdanimayforayintodefencemanufacturingatMundraAclutchofAdaniexecshasbeenmeetingrepresentativesoflargeoverseasdefencecostoexploretieupsformanufacturingdefenceequipments.

    SPOTLIGHT

    FOLLOWET:LogIn / Join

    News

    News Recos Earnings Announcements Policy MarketCalendar StockPriceQuotes

    SENSEX27,531.41 112.47

    NIFTY8,339.35 30.90

    GOLD(MCX)(Rs/10g.)26,905.00 256.00

    USD/INR63.98 0.41

    LOGINtoTrackyourInvestments

    04:05PM|26Maymarketstats

    EOD

    Home Markets Stocks IPOs/FPOs MarketStatsLive Technicals Commodities Forex Bonds Definitions StockGame

    Indiatimes TheTimesofIndia TheEconomicTimes More

    Youarehere: Home > Collections > BookValue

    (Buyingstocksthataretrading)

  • 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.

  • 5/29/2015 LearnhowtopickvaluestocksPage2timesofindiaeconomictimes

    http://articles.economictimes.indiatimes.com/20150518/news/62323235_1_valuetrapsvaluestocksbookvalue/2 1/4

    Tags: valuestocks

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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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    CorporateDossier

    Microsoft,CiscobidgoodbyetomuchhatedappraisaltoolThemainfeatureofMS'snewsystemiscontinuousfeedback.Theappraiser&appraiseearerequiredto'connect'fourtimeseveryyear.

    CanTantisteerSuzlontowardsgrowthafteraneardeathexperience?Whoshouldchangeourhabitstheleaderorthefollower?

    Slideshowsyoumustnotmiss!

    AndroidM:10thingsGoogle'slatestAndroidOScandoGooglehastakenthewrapsoffitslatestAndroidOS,thesuccessortoLollipop.M,willboastnewwaystofetchinformation.

    SPOTLIGHT

    FOLLOWET:LogIn / Join

    News

    News Recos Earnings Announcements Policy MarketCalendar StockPriceQuotes

    SENSEX27,828.44 321.73

    NIFTY8,433.65 114.65

    GOLD(MCX)(Rs/10g.)26,856.00 5.00

    USD/INR63.82 0.01

    MARKETDASHBOARD

    CREATEPORTFOLIO

    04:05PM|29MAYMARKETSTATS

    EOD

    Home Markets Stocks IPOs/FPOs MarketStatsLive Technicals Commodities Forex Bonds Definitions StockGame

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    Youarehere: Home > Collections > BookValue

  • 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.

  • 5/29/2015 LearnhowtopickvaluestocksPage2timesofindiaeconomictimes

    http://articles.economictimes.indiatimes.com/20150518/news/62323235_1_valuetrapsvaluestocksbookvalue/2 3/4

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    CheapgenericdrugseatintopharmacossalesTop10companiesthatpaymorethan25%dividendHowtopicktherightACandgetthemostfromit

    MorefromTheEconomicTimesGovernmentmulls"painless"kerosenesubsidyrevamplikelytoaidfuel25May2015

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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

    http://articles.economictimes.indiatimes.com/20150518/news/62323235_1_valuetrapsvaluestocksbookvalue/3 1/5

    Tags: valuestocks

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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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    AndroidM:10thingsGoogle'slatestAndroidOScandoGooglehastakenthewrapsoffitslatestAndroidOS,thesuccessortoLollipop.M,willboastnewwaystofetchinformation.

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    News

    News Recos Earnings Announcements Policy MarketCalendar StockPriceQuotes

    SENSEX27,828.44 321.73

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    GOLD(MCX)(Rs/10g.)26,856.00 5.00

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  • 5/29/2015 LearnhowtopickvaluestocksPage3timesofindiaeconomictimes

    http://articles.economictimes.indiatimes.com/20150518/news/62323235_1_valuetrapsvaluestocksbookvalue/3 2/5

    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.

  • 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

  • 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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  • 5/29/2015 LearnhowtopickvaluestocksPage4timesofindiaeconomictimes

    http://articles.economictimes.indiatimes.com/20150518/news/62323235_1_valuetrapsvaluestocksbookvalue/4 1/2

    Tags: valuestocks

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    (Page4of4)

    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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