Finding value stocks in an overvalued market


#1

For last few weeks I have been trying to find a good stock to invest in. I screened stocks based on their past ROE, low debt, sales growth, good cash flow, regular dividends. I assessed management quality as well as growth opportunities. I was able to shortlist many companies where I would have liked to invest.

However, all of them seem grossly overvalued based on historical PEs and intrinsic value using DCF, so could not convince myself to invest right now.

I recently read an interview of Porinju Veliyath, where he says that if you go by numbers, it’s very hard to find an undervalued stock. He does not really explain how he picks a stock.

Seniors here, do you think there are ways to pick up companies which seemingly may not be doing well at least on the financial numbers front. Wouldn’t it be a speculation, relying only on management to be able to execute and deliver in future.

Any thoughts?


(arun10dec) #2

This is really a problem in such a Market…you may have stocks which fulfill all those parameters, which we read in investment books but only problem is that such stocks are way too expensive…but in the same books we are taught about margin of safety… so now days so many good stocks but all are expensive…
But, as Basant Maheshawary says good things are always expensive…


(reachapg) #3

There are some stocks like Infosys, Sun Pharma, etc which are cheap now. Don’t they fall under the value category?


#4

I don’t know about Sun Pharma, however, my assessment is Infosys is still overvalued. While all big IT companies are trying very hard to focus on digital technologies, it will be very hard for them to replace their traditional work-streams quickly enough to make a double digit growth.


(Bheeshma Sanghani, PhD) #5

if you follow fundooprofessor , his first ever post (REFLECTIONS ON INDIAN STOCK MARKET LEVELS) in 2005 is highly instructive.

His other post from 2005, is also equally instructive :slight_smile:

Best
Bheeshma


(Tanveer) #6

I feel the Star Investor try to find the undervalued business which have a scalability not the stock price which had a deeps down due to volatility…


(Shaswat) #7

Checkout these few companies

Ashiana housing
Maithan Alloys
Nava bharat ventures
Inox Leisure
KTK bank

Few of the above stocks are available at cheap rate and others are available at decent rate. Everything on record also seems good.


(Roy) #8

@shaswat49, I’m curious as to why you consider Inox Leisure as being available cheap. For a company with an ROE of 5, and low sales and profit growth, a PE of 60 seems too expensive in my opinion. PVR and Inox posted excellent results last quarter because of the extraordinary success of Baahubali 2. There have been no such blockbusters in the current quarter and hence I expect low profits this quarter for PVR and Inox.


(chikspat) #9

Hi,

Kindly see below undervalued stock which I am holding.

  1. Alphageo: New govt. order for seismic survey if get by company, will solve visibility problem.
  2. Deep Industries: Ongoing trouble with ONGC, needs to be watched for incremental returns.
  3. Pix transmission: High rubber costs dampens last quarter results. Rubber prices to detect stock.
  4. Powermech projects: New orders will fuel the rally.

Disc: I am holding these stocks, do your own research.


(ashokkumar421) #10

I am not sure if we can find a undervalued stock with growth potential in present overvalued market.
I, myself was looking for some for last two months and every time I look at a growth potential stock the CMP seems to be over priced. But still I have seen such stocks who gave 30% - 50% returns in last three months.
Ex- IG petrochemicals LTD and Dewan housing.

Then I learnt my lesson that instead of scouting for undervalued stocks. Find growth potential stocks and get into them @ different entry levels. Use market correction as an opportunity to average the stock price.

Disc. I started following this strategy recently. And yet to see the results.


(Dhaliwal) #11

I feel the same way regarding valuations of stocks at the moment. I would prefer to wait and watch. I am keeping a few companies under my radar and will enter once the stocks come down from their current level. It is better to wait for the right time to buy a stock.

At the moment, markets are at all time high but there are many people who think it has potential to go much higher. Some global panic events can lead to a quick decline in market and this can be a opportunity to invest in some stocks.

I am not saying that Indo Count is cheap but you can see that Indo Count declined quite fast in the recent months. The company is facing tough times in the U.S. market and growth is not impressive. But, overall the stock looks good. I had bought Indo Count at 150 and sold at 200 but it has recently declined and I will consider buying it in near future.


(zygo23554) #12

Each one of my successful stock picks since 2014 have the following in common -

  1. All of them were discovered by chance/accident

  2. They do not fit the generally accepted definition of a high quality business (clearly identifiable moat, high return ratios, pricing power, free cash flow generation etc)

  3. At first sight one cannot identify most of the positives since it is a combination of factors and situations that leads to success

  4. Market prices in only a conservative (either way lower than historical numbers OR lower than what the company can do in the future) trajectory while the positive possibilities if they materialize can result in a asymmetric payoff matrix

  5. One needs to do detailed, painstaking analysis to understand the business drivers, range of outcomes and the probabilities of each outcome materializing.

In short, my take is that it is all about above average judgement coupled with a solid investment process.

It is only in a bear market that one can pick good companies at reasonable/cheap valuations and enjoy above average gains. Otherwise finding value in stocks has more to do with understanding businesses, sticking to your process and getting better at figuring out what is being priced into. Quant and number based screeners cannot help pick quality stocks that offer value in non bear markets.


(Parag) #13

This is a good topic. I have seen, and I am sure many of us also- that market valuation is on the higher side for some time now, but it does not have "Euphoria” yet. Many experts believe that there is a lot of legs left in the market to go forward. I am not an expert anything related to macroeconomic, so shall leave it here.

During the upturn/downturn, market undergoes through various phases and capitulation is one of the phases. I was under the impression that it existed only during a downturn, but someone pointed to me that “capitation” also exists during the market high.

“Capitulation”- per se, means surrendering. During the recession, the emotional pain to handle plunging share prices is too much for market participants to manage and they exit the stock/market. Capitulation happens when too many market participants try to exit at the same time, and this marks the bottom of the bear market, in some peoples view. https://asymmetryobservations.files.wordpress.com/2013/08/investor-emotion-market-cycles-fear-hope-greed1.png

The capitulation also happens when the market is going higher. We (myself and few unlock people like me) wait for the market to correct and value to appear. However, the wait does not get over. Instead, it gets longer and longer, and a share tends to scale regular new highs. Eventually, we surrender a will to wait, give up and buy the stock at a price, which normally is on the higher side and suffer consequence when the market takes a turn, which it often does.

I would be lying if I say which is the market situation is now, but it looks a nearing to the second capitulation to me.

I feel this is a testing time for a value-oriented investor. Many years back a long-term investor told me “In the Bull market, Mudhe be Zinda vote hai… and in the Bear market, Zinda be Mudhe vote hai “- It means (In Bull market dead stock become very active and in bear market good stocks become dead). One can see the stocks which were hardly traded a few years back or unknown, are catching investors fancy. I have seen this happening a few times earlier, and I see no reason to be different this time.

I think overall the market is driven by Private Banks and NBFC’s in general. Of course, there are other stocks which are on sound footing, but they are not many, and many investors are chasing them.

I think IT is a sector which has value and looks like “Throwing a baby with a bathwater” situation. I agree the growth rate has come down in single digits for the major player (Infy, TCS, WIPRO). However, there are still a lot of player- niche or otherwise- which are also impacted by the overall sectoral apathy. There are many IT companies which have ROE > 30, no debt and double digits growth coupled with buyback. These companies could be a good candidate for a decent return in my view. Agree, there are headwinds, but IT has always suffered one headwinds or other and they have always flourished so far. And, a lot of these headwinds, is already factored in the share prices, so there is not much optimism build into these stocks prices. I am finding this is strong hunting grounds for the stock. They may not multiply from here, but I would rather have protected downside than unprotected downside in “Hot Stock”.

Howard Mark’s quote looks apt to me “Move but with cautions!."


(Changu Mangu) #14

Absolutely Right Sir. Market is pulling in the remaining bears right now :slight_smile: Most start losing their control as the markets keep rising and everyone else is making money except those who try and remain rational. This finally makes even the very patient give in and that is then euphoria stage.

I myself nearly got sucked in, and realized just in time what I am about to do; and better sense prevailed.


#15

A quote from Howard Marks:

“You simply cannot create investment opportunities when they’re not there. The dumbest thing you can do is to insist on perpetuating high returns—and give back your profits in the process.”


(Karthik) #16

There is always an opportunity somewhere. You just need to look harder. The screens may not show it.There will always be a 4-5 % correction or 10% percent correction. Some midcaps fall 30-40% percent. Just have to look harder. While the market may not go anywhere there will be stocks just double in the same time frame.There are always stocks that are overvalued or undervalued.


(vikrantmehta888) #17

look at kellton tech, at pe of 9! fear has created opportunity!


([email protected]) #18

Check the following stocks
Bhageria Industries
LEEL , Today it was down by 0.87 % only
Mayur Uniquoters
Supreme Petrochem (Zero Debt Co, Recently Motilal Oswal visited the CO’s HO)
DCM Shriram Ltd
Trent…Currently it is fairly valued…but it is expanding stores across India.Recently It has joint ventured with Tesco


(madhavikkutti) #19

Dear @dheegarg, Request you to have a look at Arihant Capital Markets. As per my study, it is a deeply undervalued stock, though a cyclical one. I have written in very detail about this stock at the following thread:


#20

Thanks, will take a look.