VALUE OR GROWTH - WHAT DECIDES INVESTMENT?
By Ruma Dubey
“Any stock worth buying?”
That seems to be the constant quip every time the market goes up. Markets hitting new highs eggs on some people to explore buying opportunities.
And when asked, “Are you looking for growth stock or value stock?” most are stumped and just shrug their shoulders and say that any stock as long as it makes them money.
Making money alone cannot be the criteria for investing – it is the driving force but it you do not look at growth or value as two decisive factors of investing, buying shares could always remains a losing proposition.
But therein lay the flaw – growth and value are like Siamese twins joined at the hip and where growth is a component of calculating value. So what this means that every investment that we are making is essentially about getting the value for your money.
Thus if the ultimate purpose of investing is to get value for your money, then it definitely means that one has to buy stocks when quoted at lower rates and then wait for the value to get recognized by others. On the other hand, growth stocks are those which are already on the rise, have caught the investor fancy and the underlying assumption here is that growth of the company and stock price are directly linked and this is based on overall profitability estimates of the company and lesser of the sector.
Todays situation does explain this concept of value investing very well. Suddenly there is a long queue to but infra and capital goods stock. Foreign research houses have gone ‘overweight’ on private sector banks and are eyeing PSU banks as they feel that they have been beaten down enough and are now poised for growth. On the other hand, they are shunning FMCG and IT stocks as they feel these stocks have gone much ahead of their intrinsic value.
Or in case of individual stocks, take the case of BHEL – the PSU remains in a tight liquidity environment. Its Q3FY14 net profit dropped 41% on a QoQ but YoY was up 52%. This can be attributed to the fall in operating costs – it came at 93% of net sales compared to 99% in Q2. Despite dire financial conditions, at the behest of the Govt, it declared an interim dividend of Rs 1.31/share on Rs.2 face value. But is it really so cash-rich? The company, as at 30th Sept 2013 had cash balance of Rs.6221 crore, down from Rs.7732 crore in Q2FY13. As such there are reports coming that BHEL might have to write off part of the Rs.39,000 crore that clients owe the state-controlled power equipment maker in overdue payments. Thus it seems to have a negative cash flow on account of its receivables and to hand-out a dividend at this stage does not seem prudent. Yet, many have started banking on this stock, feeling that the worst is over for both BHEL as well as the power sector, hence it expects uptick in earnings in price. This is value buying – it may or not be right but the faith that is that its long term story is now looking good.
Many feel that it is the PE which determines the value of a stock. Well, they couldn’t be more wrong. PE indicates investor fancy but it cannot be the true yardstick to measure its value. Stock like United Breweries is quoted at a PE of over 130 but there are people still buying into the stock as they see Heineken interested in the company and expects mega growth in the company based on the growth prospects of the sector. Or there is Just Dial which is quoted at a PE of 101, valuations running ahead of its fundamentals.
On the other hand, there are illustrious and very sound companies in South India – the Lakshmi group, TVS, Murugappa, Shriram group and many more which are financially very sound, with excellent cash flows yet they command a very low, single digit PE. Now these are value stocks but the marketmen just do not seem to favour value.
So then how exactly does one identify a value stock? Warren Buffett rightly puts it – “ Value investing connotes purchase of stocks having attributes such as a low ratio of price to book, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth. Correspondingly, opposite characteristics -- a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield -- are in no way inconsistent with a “value” purchase. Similarly, business growth, per se, tells us little about value.” He succinctly explains, “ investors will benefit only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts investors.”
Thus PE, dividend yields can be one of the components of measuring growth but if we want our money to earn more, we need to assess the cash flow of the company over the next few years – whether it will be positive or negative and then the macro factors governing the sector, which may or may not warrant future plans for expansion. Thus growth needs to be looked at from a free flowing cash perspective and how well it can be used for future growth enhancement. What is the point of a company giving high dividends and having good profits, if all its cash is to be eaten up by paying interest on the high debt it has taken?
Despite the run-up in stock price, there are still many value stocks in the market, which will bounce back when economy improves. Look at the infra space and PSU banks. The story is good for cement and if you have the conviction that auto stocks will fare once interest rates start coming down, they too will prove to be value buys.
Remember, value stocks are like pickle – they will taste better over time; so patience is integral to realize profits. Such stocks will give you a steady earning, are low risk and thus high on safety. Lakshmi Machine Works, IDFC, Wheels India, Hind Zinc, L&T, Zee Entertainment, Seamec are some of the good value stocks which one can consider for investment.