India-First-Global-Insights-Analysis -Sharing-PlatformIndia-First-Global-Insights-Analysis -Sharing-Platform

Stocks cheaper than their Book Value-Performance Review

, January 24, 2013, 0 Comments

In our article Bargain Hunting: Stocks cheaper than their Book Value, we had indicated certain stocks as a better bet compared to others following simple strategy of Bargain Hunting on the basis of relatively lower P/BV ratio (less than 1). Since more than 2 months are over, it is time to examine performance of our recommendation.

We had shortlisted seventeen stocks with criteria of minimum market capitalization of INR6 bln (to remove illiquid and small stocks), minimum last twelve month (LTM) return on equity of 10% (to keep quality stocks) and minimum 5 years LTM revenue compounded annual average growth rate (CAGR) of 10% (to keep quality stocks). Let’s see how these seventeen stocks performed:

To make specific recommendations, we had plotted these stocks on different parameters. Our first basket was shown in yellow circle of Chart 1 (P/BV Vs ROE). Performance of this basket is as follow

Our second basket was shown in yellow circle of Chart 2 (P/BV Vs 5Y Revenue CAGR). Performance of this basket is as follow:

Our third and final basket was shown in yellow circle of Chart 3 (P/BV Vs Gross NPA). Performance of this basket is as follow:

Above table indicates that our recommendation have beaten respective benchmark (S&P CNX Nifty or S&P CNX Bank) on overall basis (seventeen stocks) or in different baskets. The best performing basket is Basket 3 (composed of only banking stocks) performing significantly better (almost double) than its benchmark (CNX Bank). This goes in line with our view that NPA concern and beating of public sector banks is overdone and hence banking stocks should move up in view of improving market conditions. However one should still be watchful of NPA conditions of banks as NPA worry continues.

Relatively better performance of these stocks compared to index reinforces the view that that the stock should trade at least at book value given normal market conditions.


About author
Rajesh Ranjan is a Chartered Accountant with Post Graduate Diploma in Investment Analysis and MBA(finance) from Asian Institute of Management (AIM), Manila. He has around nine years of experience in the field of investment research (equity and fixed income) with leading financial services firm such UBS and Guggenheim Transparent Value. ...more