Value Investing’s Gaining Weight on a Pricey Street
Value stocks are gaining prominence over growth stocks in the portfolio of institutional investors as earnings are yet to catch up All intelligent investing is value investing — acquiring more that you are paying for. You must value the business in order
ET Intelligence Group: With benchmark equity indices hitting fresh highs, Indian investors appear to be tilting pronouncedly toward Benjamin Graham’s ‘value’ investing principles, temporarily giving up Philip Fisher’s ‘growth’ stocks approach to wealth-building.
Value stocks are those trading at lower price-earnings (P/E) multiples with average earnings growth prospects. By contrast, growth stocks trade at higher P/E andtypicallyofferbetterearningsgrowth visibility. In a typical bull market, the initial rally is driven by growth stocks.
With the current rally in Indian equities showing signs of fatigue, ‘value’ stocks such as Mahindra & Mahindra, Bajaj Auto, Bharti Infratel, Lupin, Cipla, and HCL Tech posted positive returns in the past one month. These scrips had delivered negative returns between January and September.
‘Value’ stocks are gaining prominence over ‘growth’ stocks in the portfolio of institutional investors as corporate earnings are yet to catch up. About half of the BSE 200 stocks have witnessed a reversal in the relative performance trend. The positive change is seen in large-cap laggards, while negative change is visible in expensive stocks.
Investors turned cautious on ‘growth’ stocks as they were trading at 20-50% premium to their five-year average. Expensive valuations left very little safety margins, and investors gradually increased exposure to ‘value’ stocks. For instance, M&M is one of the few auto stocks trading at lower than its long-term average at a time the rural market is suggest- ing a recovery. As India’s largest tractor maker that has been consistently demonstrating market share gains, M&M has emerged as an attractive value stock.
The shift to ‘value’ stock will likely gather pace after the government announced measures to revive growth. Bank re-capitalization, lowering of excise duty on fuel, and higher minimum support prices for crops should spur consumption, and help end the overhang of non-performing loans. Re-capitalization has also turned state-owned banks into attractive investment options, and CLSA has added State Bank of India to its model portfolio.
Value stocks in sectors such as energy, state-run banks, capital goods, mining, and metals trade at about 13.8 times their one-year forward earnings, which translates into a 23% discount to the Nifty’s valuation. Growth stocks trade at 20-25% premium to the Nifty’s valuation despite the recent drop in their prices. The Nifty trades at 18 times FY18 earnings, a 24% premium to its long-term average.