Looking for value stocks? Here’s a selection among large caps
The Indian stock market has entered a volatile territory after a sharp slide during the last few weeks after testing a previous peak in January. The benchmark indices are just 5% shy of their all-time peak as bulls seek to slowly push back share prices from what they believe was an oversold zone.
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 grows, 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.
Value stocks refer to shares of firms that appear to trade at a price below what is suggested by their 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 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 more than a dozen large-cap value stocks that score high on the Piotroski’s scale currently.
This list includes Bajaj Finserv, Vedanta, Divi's Laboratories, DLF, Jindal Steel & Power, Torrent Pharma, HAL, SAIL, Astral and Zydus Lifesciences.
Others in the club include Persistent Systems, NHPC, Supreme Industries, NALCO, KPR Mill and Emami.
Several of these are names who have been in the club for a while. The new additions among these are Astral, Zydus, NALCO and KPR Mill.
Those that vacated their spot in this list are Cipla, UPL, Cadila Healthcare, Balkrishna Inds, Deepak Nitrite, Dr Lal Pathlabs, Escorts, Tanla Platforms and APL Apollo Tubes.
Out of these, Zydus, HAL and NALCO 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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