ICICI Securities believes value stocks with hints of outperformance are emanating from financials, commodities & industrials. In a report titled 'iLens Screener', the brokerage house noted that the value factor has started to outperform since FY21.
It has attributed this outperformance of the value factor to macro demand in the economy, which is largely emanating from sectors related to; (a) the investment cycle (includes the buoyant real estate cycle); (b) the credit cycle accompanied by the bottom formation in the NPA cycle and (c) buoyant demand and price realisation for commodities.
"Stocks related to the aforementioned sectors are typically capital-intensive, cyclical and value stocks. Our back-testing indicates that as long as the investment, commodity and credit cycle continue to be robust, value stocks will have the necessary catalysts to keep outperforming," it said. Pockets of discretionary consumption are also showing robust demand, but they typically fall under growth stocks, added the brokerage.
The brokerage has divided value stocks under its coverage universe into buckets of large-, mid- and small-cap stocks and sorted in ascending order from ‘deep value to value’.
In the large-cap space, ICICI Securities sees value in ONGC, IOC, Coal India, NTPC, GAIL, BPCL, SBI, Axis Bank and IndusInd Bank.
Meanwhile, among midcaps, the brokerage has listed Oil India, PFC, HPCL, HNPC, JSPL, Federal Bank and L&T Finance as top-value picks.
Finally, in the smallcaps, Shyam Metalics, DCB Bank, Manappuram Finance, PCBL, Jindal Stainless, Engineers India, Spandana and Gokaldas Exports are its top value ‘buys’.
What is Value investing?
“Price is what you pay. Value is what you get.” -Warren Buffett
The brokerage defines value strategy as picking stocks wherein the market is pessimistic about the future growth prospects of a company to start with while the fundamentals of the company remain robust amid improving near-term growth prospects. The success of a value strategy hinges on avoiding ‘value traps’ and signs of ‘recognition of value’ by the market, it cautioned.
Its value strategy framework attempts to measure these traits as follows:
Measuring market pessimism by ‘reverse engineering current stock price’: "A stock starts getting into the value zone once the MILTGV (market-implied long-term growth value) starts dipping below 40 percent. This, in simple words, means the market is assigning <40 percent of the current market price to growth in earnings beyond the explicit period ending FY25E thereby paying lower for speculative growth in the long term. For deep-value stocks, the market-implied value for speculative growth beyond the explicit period falls to zero or negative value," explained ICICI Securities.
Avoiding value traps: Book to market value, or inverse of P/B ratio is one of the risk factors that drive portfolio outperformance apart from market risk and size, informed the brokerage. Stocks are valued lower for various reasons related to uncertainty about their future fundamentals and the risk of buying into a ‘value trap’ always exists, it cautioned. Also, a value stock could be ignored for an extended period of time due to behavioural biases resulting from emerging investment paradigms or themes (a recent example of ESG risk exposure stocks becoming unpopular). Hence the key to value strategy is to minimise the said risks, it said.
The brokerage further mentioned that it tries to address these above risks by using the following two factors:
1) Market should begin noticing the attractive valuation of the stock and positive fundamental prospects reflecting in hints of relative outperformance.
2) Its sector team’s positive assessment of the fundamental prospects of the stock in the near term is augmented by a fundamental BUY rating.
While investors can use this strategy to pick value stocks in the future, it is always advisable to contact one's financial advisor before making any new investment.
