Lecture on Value Investing

Introduction

• Focus: Value investing and methods to pick value stocks
• Will discuss value investing directly via stock picking and through mutual funds
• Agenda:
  1. What is Value Investing?
  2. How to pick value stocks
  3. Investing in value stocks through mutual funds

What is Value Investing?

• Definition: Investing with a margin of safety, buying assets at less than their intrinsic value.
• Reason for discount: Often because these stocks are overlooked and not trendy.
• Benefit: Stocks offer valuation comfort and may not fall as steeply during market corrections.
• Example:
  • Stock Analysis: Mazagon Dock Shipbuilders, a significant gainer over a year.
  • Price increase and PE ratio from March to September 2023 explained to demonstrate value unlocking.

Picking Value Stocks

Approaches to Value Investing

1. Discount to Historical Price to Earnings Ratio (P/E)
2. Discount to Historical Price to Book Ratio (P/B)
3. Low Price to Earnings Growth Ratio (PEG)
4. Market Laggards Approach
5. Piotroski F-Score

Foundational Filters (Hygiene Filters)

• Market Capitalization: Minimum 1,000 crores
• Debt to Equity Ratio: Less than 1 (excluding banking/finance companies)
• 5-Year Average Return on Equity (ROE): At least 15%
• 5-Year Earnings Per Share (EPS) Growth: At least 12%

Examples with Applied Filters

1. Discount to Historical P/E

   • Definition: P/E = Stock Price / Earnings Per Share
   • Example: Stocks trading at 25%+ discount from their 5-year median P/E

2. Discount to Historical P/B

   • Definition: P/B = Stock Price / Book Value per Share
   • Note: Useful especially in asset-heavy sectors
   • Example: Stocks at a 25%+ discount from their 5-year median P/B

3. Low PEG Ratio

   • Definition: PEG = P/E ÷ Earnings Growth
   • Example: Top 20 stocks with PEG < 1

4. Market Laggards

   • Definition: Stocks performing worse than the index
   • Example: Stocks fallen by 25%+ over the last year (after applying hygiene criteria)

5. Piotroski F-Score

   • Definition: 9-point framework assessing recent financial performance. Score 0-9.
   • Example: Top 20 stocks with F-Score of 8 or 9

Additional Considerations

• Due Diligence: Importance of analyzing stocks thoroughly beyond basic criteria.
• Beware of Value Traps: E.g., companies in a governance crisis might appear undervalued.

Value Investing via Mutual Funds

Types of Mutual Funds

• Value/Contra Funds: Invest in undervalued stocks contrary to general market trends.
• Active Funds: Highly varying strategies
• Popular Value Index Funds:
  • Nifty 50 Value 20 Index: Comprises 20 value stocks from Nifty 50
  • Nifty 500 Value 50 Index: Picks 50 value stocks from broader Nifty 500

Performance Comparison

• Nifty 50 Value 20 vs. Nifty 50:
  • 5-year rolling returns favor value 20 index
  • Higher volatility noted
  • Outperformed in 10 of last 15 years

Sectoral Allocation for Nifty 50 Value 20

• IT: 40%
• FMCG: 26%
• Metal & Mining: 10%

Final Notes on Value Investing

• Evergreen Style: Not just a hedge, appropriate for long-term portfolios
• ETF Options: Use passive funds for consistent value exposure

Conclusion

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• Reminder: Mutual Funds investments carry market risks, read documents carefully