Podcast | NSE Invest O Cast episode 6: What are value stocks and how can you spot them?

Image result for Podcast | NSE Invest O Cast episode 6: What are value stocks and how can you spot them?Hrishi K: Hello and welcome to NSE Presents: Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl.   I’m your host Hrishi K and this podcast is all about getting your money to make better investments for you in the new financial year.

To make better investment decisions, awareness about different kinds of stock options is key, in today’s podcast we are going to be talking about value stocks, how to spot them and make the best out of them. Now as the name suggest a value stock is a stock that tends to trade at a lower price relative to its fundamentals, such as Dividends, earnings and sales.

All of these indicators are based on the fact that the market is not always efficiently matching price with performance. Investors are betting that this inefficiency gives them an opportunity for stable returns. Some common characteristics of value stocks include a high dividend yield. Low price to book ratio and or low price to earnings ratio, but to be able to make the most of value stock options we first need to understand the basic principal of why it is important to invest. And to do this we have our special guest on the show with us today. All you have to do is sit down, relax and listen to the best of advice from the industry expert of the day on Invest-O-Cast. Because we are here to help you understand all about value stocks and how can one spot them in today’s podcast.

Hrishi K: National Stock Exchange (NSE) with the help of Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl is committed to breaking the limitations of geographical boundaries and reaching investors across the country. In today’s episode we talk about, value stocks and how can one spot them. To help us with this I have with me Kshitij Anand, Editor Markets at Moneycontrol.com. Kshitij has a decade of experience in watching stock markets go up and down. He is an analyst by profession, and spiritual healer by choice. Before MoneyControl he has worked with a few leading publishers in India, he is also an MS is finance and a Certified Financial Analyst, a CFA from the prestigious ICFAI university Hyderabad.

Welcome Kshitij! We are very happy to host you on the show.

Kshitij Anand: Thank you so much Hrishikesh.

Hrishi K: Well, I am going to ask you how the spiritual healing helps in the high stress a rigmarole of the daily life.

Kshitij Anand: It does help you to keep calm. When the Sensex is let’s say tanking by 1000 points or maybe NIFTY is up by 500 points, well it does help in to get the momentum going.

Hrishi K: Fantastic! And in a way you are healing our listeners here with your advice or with your opinions; I would rather put it that way.

Kshitij Anand:  Absolutely! Meditation does help when you are in a stock market, I think one thing is required that like if we do regular meditation it will help you do deal with the volatile tape, we have got technical indicators to deal with that but then again if you do meditation regularly I think that is the best tool to have.

Hrishi K: Well your smile is very Zen so on that note let’s start; we would like to understand why should one invest the fundamental question? I mean it is all nice to say, live for today, forget about tomorrow but essentially why?

Kshitij Anand: You know I realized quite early in my life that investing helps you to get through your bad days as well as good days but also it helps you to achieve your goals. You know goals could be you know buying a new car, especially when you start earning that is the first thing that you want to do, you know go out shopping or get some asset for yourself it could be a car, it could be a house and so on and so forth. You know the money you earn is partly spent and the rest is saved for meeting future expenses now that might sound really sort of theoretical at this point of time. So if in case if you start investing at an early stage there are higher chances that you will be able to meet your goals quite early in your life as compared to others who are not investing and why should one invest. Well there are 3 basic principles for that

    • Earn return on your idle money.

    • Generate a specified sum of money for a specified goal in life.

    • Make a provision for an uncertain future.

I think we all agree to that, that future is tremendously uncertain.

Hrishi K: Well yeah it is! There is no doubt about that and for turbulence that’s great advice. Kshitij, you have changed a lot of peoples view on investments slightly already by likening life and investments which is great. But, tell me when should one start investing? Now that you have answered the why, let’s get into the when.

Kshitij Anand:  See very important question and before we actually discuss what to pick and how to pick stocks. The first step is have you started investing? Now this question does not go to you Hrishikesh but the ones who are listening to the podcast at this point in time. The answer to the question is the sooner one starts investing the better it is. By investing early you allow your investments more time to grow, whereby the concept of compounding comes in. Well, compounding that is a big word and very technical by nature but not a problem let me help you understand it. Well, compounding increases your income, when the principal amount and the interest or the dividend earned on it is reinvested, not just on the daily basis but year after year. So that’s how you help your money grow. There are three golden rules for all investors when it comes to investing:

    • Invest early.

    • Invest regularly.

    • Invest for the long term and not short term.

This is very important and if you understand this quite early in your life I think the goal to become a crorepati or millionaire is not far away.

Hrishi K: Well, noted with the sense of great pride Golden rules! But, tell me something for someone who is investing for the very first time there is obviously some kind of fear and some kind of anxiousness and some kind of nervousness, what are precautions one must take before investing in the stock markets?

Kshitij Anand:  Right, this is very important for someone who just started investing or especially in a stock market whether it could be direct investing into stocks or via mutual funds. Now as highlighted by NSE, I have highlighted certain principals. Now the first and foremost is

    1. Avoid WhatsApp advice – when some company sends you a stock suggesting that could actually get a double-digit return. I think the best thing to do at that point of time is to just ignore because a) we all know that nothing is free of cost, so it is always important to avoid that kind of advice which is coming to you free of cost.

    1. b) Second rule we have is- Do not be misled by market rumors, luring advertisement or ‘hot tips’ of the day.

    1. c) Third golden rule is that- Do not be attracted by announcements of fantastic results/news reports, about a company. I think it is better to do your own research before investing in any stock.

    1. d) Going on to the fourth one- Investing in very low priced stocks or what are known as penny stocks does not guarantee high returns. Now I will just elaborate this point that whenever you see stock let’s say trading at 10 or maybe 6 rupees and if you are thinking that, that’s a value stock I mean don’t get mistaken, that might not be the value which you want to get at that price

    1. e) The last and the foremost is- Be cautious about stocks which show a sudden spurt in price or trading activity. So if in case, let’s say a stock was trading in single digit and in just one day it goes and becomes a double stock that doesn’t mean that there is value in the stock.

Hrishi K: These are great insights. You heard how I began the show,  so as you know NSE Presents: Invest – O- Cast (An exclusive investor podcast) Powered by MoneyControl is all about helping people learn about their finances on the go… so it is obvious now that we would like to understand from you: Value stocks? And why are they called value stocks in the first place Kshitij?

Kshitij Anand:  Value stocks, yes it’s not something out of the books.  Let’s first understand what do we mean by the term ‘value’? Let’s first understand what we mean by value. Let’s first understand I will not get into the technicals but understand investors with the small examples. Well, we all go shopping and in the mall. And we usually get attracted by a huge discount and suddenly our eyes get glued to one sign you know which says ‘discount up to 50%’.  Whatever it’s worth, it means that I am getting something which is half of what it was quoting let’s say a week or a month back. Well, the decision to buy comes when I know that it is a reputed brand and even if I pick something which is quoting half its price, the value which I would be deriving is much more. Similar is the case with stocks… Whenever you buy a stock, you want its intrinsic value or the true value to be higher than its market price. In this way, you would be able to generate higher returns over a period of time.

Hrishi K: That’s very very lucid, very well explained. So now how can one spot these value stocks?

Kshitij Anand: Well spotting value stocks is actually easy, and you know if you have common sense, patience, money to invest that’s the foremost thing and the willingness to do some research, I think everyone can become a value investor. Now value investors actively seek out stocks that believe the market has undervalued, or have corrected without any meaningful erosion in fundamentals of the company. Now, let’s jump to your question – how can one spot value stocks. Well to start with many financial or stock market-related websites have screeners for value stocks which could act as your first filter. In fact Moneycontrol has also got a filter to spot value stocks. The next method is slightly more tiring but very interesting to do some bit of number crunching on your own. So if you are a quite follower of the yellow newspapers you would know that there are 2 or 3 basic ratios which one needs to attract. So Investors can actually look at P/E ratio and compare with its historic average and the second is looking at earnings yield. So a high earnings yield tells investors that a stock generates high earnings relative to its share price. Now the third rules for finding undervalued stocks are:

    • The stock should be trading below average price-to-book value.

    • It should be trading lower than average price-to-earnings (P/E) ratios, and the third is…

    • It should give higher than average dividend yields.

These are the 3 concise golden rules for spotting a value stock.

Hrishi K: Kshitij, I am just curious how did the concept of Value Investing actually come up, how did the concept of Value Investing emerged?

Kshitij Anand:  Hrishi, the concept is not new and is in fact age-old. We have been applying it in our daily lives in one form or the other. We just started applying this in the stock market and that is why it got so much attention. Now that you asked, there are a lot of famous personalities which have made this investment style more popular.  Warren Buffett, Peter Lynch, and other successful investors focused on value investing in identifying investment opportunities. Now one of the reports suggests that ‘Value investing’ came from a concept by Columbia Business School professors Benjamin Graham and David Dodd in 1934. Warren Buffet is perhaps the most well-known value investor. Studies have consistently found that value stocks outperform growth stocks and the market as a whole, over long time horizons.

Hrishi K: You briefly mentioned growth stocks. Are growth stocks different from value stocks Kshitij?

Kshitij Anand: Yes, investors often get confused about the difference between growth stocks and value stocks. The difference lies mainly in the way in which they are perceived by the market. When we talk about growth – the term is associated with companies whose earnings are expected to continue growing at an above-average rate relative to the market. Now growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios, now these are the 2 distinctive features of a growth stocks. Investors who invest in growth stocks receive returns from Capital appreciation which is nothing but the difference the amount paid for a stock that you bought it and the current value of the stock at the time of sale, rather than dividends, so the difference is the capital appreciation you get. Now very small example, suppose you buy a stock for rupees 10 and you are selling it let’s say at 14, the capital appreciation is 4 or a 40% return on your investments. Now that is a very good return, 40% return is a double digit return, anyways coming back to the value stocks. Value stocks, on the other hand, have low current price-to-earnings ratios and low price-to-book ratios. Investors buy these stocks in the hope that they will increase in value when the broader market recognizing their full potential, which should result in rising share prices, but that is over a period of time and not soon. I mean it is not immediate.

Hrishi K: We are going to wrap this discussion by you telling us or taking us through the benefits of Value stocks Kshitij.

Kshitij Anand:  Benefits are plenty, but if I have to sum it up then:

    • Well, it helps you spot stocks which have a higher chance of creating wealth over a period of time

    • It offers a superior risk-adjusted return to investors

    • It teaches investors to be patient with their investment because buying stocks that are cheap is easy, but returns will take time; you know when the market realize the true potential of the company.

    • It is more a qualitative concept than a quantitative one. The belief in your conviction is the most important trait in the process.

Hrishi K: Amazing!  We have had some really insightful points on what Value stocks really are. How to spot them and how to make the most of them listed out by Kshitij Anand today. And I am going to take you through it quickly now “Wisdom in the bank” segment:

    • Life is uncertain so make those decisions to use your ideal money to invest.

    • Allow the power of compounding to work for you, start investing early.

    • Don’t be misled by the market rumors.

    • Be conscious when there is a sudden spurt in trading activity.

    • You want a stock’s intrinsic value or true value to be higher than its market price.

    • Stock market related websites have screens and shots and sections for value stock growth, follow them.

    • Warren Buffett is perhaps the most well known value-investor.

    • Growth stocks generally have a high Price to Earnings ratio.

    • And finally, value stocks are a qualitative concept as opposed to a quantitative concept.

Kshitij thanks really for helping us understand Value stocks better. It was a pleasure chatting with you on the show.

Kshitij Anand: Same here Hrishi, same here. Thank you!

Hrishi K: From today’s session, we understand that if you want to become a value investor the key is to seek stocks that are trading at a price less than they are worth. There are investment services and guides that monitor the indicators of value stocks, but investors must interpret these analyses and make decisions based on their own instincts and what they think is the value, performance, and the underlying fundamentals of the company itself and its stock.