Stick to value, returns will follow

Last Updated: Wed, Oct 10, 2012 10:10 hrs

Value investing in equities has many takers. Some, like Warren Buffet and Benjamin Graham, have honed it to perfection. But it is a concept that could work even for ordinary investors. Typically, it is a low-risk way of investing in good companies. Value stocks give predictable but lower returns as compared to growth stocks.

Value investing is picking up stocks of those companies whose inherent values are much more than the prevailing prices. The price is lower because of the perception that the company is not a high-growth company or an aggressive company and, hence, the returns may be lower. Therefore, prices of such stocks are lower than the inherent value.

Raghavendra Nath, managing director (MD) and chief executive officer (CEO), Ladderup Wealth Management explains, “When you invest in growth stocks, you are ready to pay higher price expecting that the high growth will become even higher. As against this, when you invest in value stocks you are very conscious of the price you are investing at.”

Most cyclical sectors would fall in this category, says Nath. Some of these could be sectors like metals or shipping. In case of shipping, for instance, when the business cycle is good, shipping companies add capacity. But when the business cycle turns bad, the capacity becomes excess and margins get hit.

Another category of value stocks are stocks is high dividend yield paying companies. Here, the perception is that the company is not deploying profits back into the business, Instead, it is using the profits to reward investors and itself. Therefore, the assumption is that the company may not be expecting high growth in future and hence, the stocks are valued lower.

However, value investing does not mean only picking up stocks at low values. That is a misconception, says G Chokkalingam, chief investment officer (CIO) and executive director (ED), Centrum Wealth Management.

“Trying to pick stocks through value investing might lead to investors ending up with dud scrips. So, it is up to the investor to weed out such scrips. One must look at the consistency of profitability, whether the company is undergoing any debt restructuring exercise and at the promoter stake in the company. If the promoter stake in the company has seen a sharp decline then it is a wrong sign,” he warns.

When it comes to value investing there are some parameters that an investor needs to keep in mind. One should thoroughly read the balance sheet of the company. Also, look at the dividend history of the company and its tax liabilities. Take a look at the top line and bottom line of the company over the last two to three years, says Alex Mathews, head of research, Geojit BNP Paribas Financial Services.

At any point in time you will find stocks which are low in value. In different market situations you will find value stocks in different sectors.

Today, for instance, infra stocks are value stocks because India's infrastructure story is yet to unfold. When it does these companies will gain. Real estate could also be a value sector, in today’s market. One can also get good value bets in the banking sector as there is good scope for price appreciation.

Investors who are not comfortable investing directly in equities, can choose mutual funds which follow value investing. Most of the big fund houses have schemes that follow this strategy of investing.

According to S Naren, CIO, equity, ICICI Prudential Mutual Fund, value investing is not time dependent and it is the best strategy when there is pessimism in the market. “Such schemes look for stocks that may be beaten down because of recent underperformance. It is a style of investing that has worked well globally,” he says.

These funds are apt for investors with low risk appetite. Investors who do not have a lumpsum to invest, but want to enter the equities market, can opt to invest in such funds through a systematic investment plan.

In the last one year, the BSE Sensex has gone up by 14.03 per cent, Nifty by 15.38 per cent and BSE mid-cap by 7.79 per cent. In comparison, some of the schemes that fall under the value investing concept have given better returns. For instance, ICICI Prudential Discovery has given 24.17 per cent, HDFC Capital Builder 14.59 per cent and Fidelity India Value 16.54 per cent.

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