Looking for value stocks after market mayhem? Here’s a selection to choose from
The Indian stock market indices, which have been consolidating around 10% below the all-time high after coming under a bear grip, sank again on Friday as the bulls lost control of the reins.
In a bull market, it’s easy to be swayed by a herd mentality to look for growth stocks. But as concerns of valuations in the market grow, investors start looking at alternative investment themes such as value investing.
On the flip side, when the markets are flush with liquidity, it is not a no brainer to identify value stocks, which refers to shares of firms that appear to trade at a price below what is suggested by its fundamentals, such as earnings, revenues and dividends.
One way to gauge a set of such companies is to scan them through the lens of the Piotroski score, named after Chicago accounting professor Joseph Piotroski, who created the scale. The parameter covers aspects of profitability; leverage, liquidity and source of funds besides operating efficiency.
Companies are awarded scores for sub-parameters under each of these three broad heads including one point each for positive net income, positive return on assets (ROA), positive operating cash flow and cash flow from operations being greater than net income.
It also captures lower amount of long-term debt in the current period, compared to the previous year and similarly higher current ratio this year and whether or not any new shares were issued in the last year to get a picture of dilution.
The score also picks one point each for a higher gross margin and higher asset turnover ratio compared to the previous year.
In total, stocks are weighed on these nine sub-metrics with higher score making it a more attractive value stock.
Typically, stocks with scores of 8-9 are considered the most lucrative from a value investing theme.
Based on this criterion, we get a list of 58 value stocks that score high on the Piotroski’s scale currently.
If we pick some of the better-known names among these we get: ABB India, Ambuja Cements, Vedanta, Dhampur Sugar, Rain Industries, SAIL, Sanofi India, Talbros Automotive and Tata Consumer Products.
Some of these have been in the club for a while such as Vedanta and SAIL.
Out of these, just one—ABB India—is pitched right at the top with a score of 9 on the Piotroski scale.
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