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Looking for value stocks? Here’s a selection among large caps

by 5paisa Research Team 08/12/2021

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 easy to identify value stocks, which refer to companies that appear to trade at a price below what is suggested by its fundamentals such as earnings, revenue 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, source of funds and 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 around two dozen large-cap value stocks that score high on the Piotroski’s scale currently.

This list includes Bajaj Finserv, Vedanta, Divi’s Laboratories, DLF, Cipla, UPL, Torrent Pharma, Cadila Healthcare, Steel Authority of India, Astral and Hindustan Aeronautics.

Others in the club include Balkrishna Industries, Jindal Steel & Power, NHPC, Persistent Systems, Deepak Nitrite, Supreme Industries, Dr Lal Pathlabs, Escorts, Tanla Platforms, Emami and APL Apollo Tubes.

Out of these, a handful—Torrent Pharma, Cadila Healthcare, Hindustan Aeronautics and Emami—are the ones with a market cap of over Rs 20,000 crore and pitched right at the top with a score of 9 on the Piotroski scale.

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