There is a section of investors who are choosing to flock to low P/E stocks for reasons such as better earnings progression, sector-specific demand cushion and even better balance-sheets, says Market experts
Stocks with low price-to-earnings (P/E) ratio, commonly referred to as value picks due to relatively cheap valuation, in the BSE 500 index have started outperforming their high P/E peers, as bulls look for new ways to make gains.
While the low P/E stocks had outperformed high P/E ones by 20% for the one year-ended February 2017, investors changed sides thereafter, forcing low P/E shares to underperform by as much as 8% till June 2017, shows an analysis.
Growth stocks usually command higher valuations because investors are ready to pay a solid premium if there is a promise of fast growth in future. However, when a large section of investors chase growth, valuations often rise to stratospheric levels in such stocks. This is when cheap stocks regain popularity.
Market experts say that with Sensex and Nifty trading at new highs of 32000 and 10000, respectively, there is a section of investors who are choosing to flock to low P/E stocks for reasons such as better earnings progression, sector-specific demand cushion and even better balance-sheets. Whatever be the specific reason, value stocks of-late are clearly doing better.
"The MSCI India Value Indices outperformed the MSCI Standard and Growth Index for the second consecutive month (in August) by 0.2 percentage points and 0.4 percentage points, respectively," say Morgan Stanley India strategists Ridham Desai and Sheela Rathi.
In July and August months, low P/E stocks have done well. Low P/E stocks are the ones that have a future price/earnings (P/E) lower than the median of BSE 500 stocks. Favorable share movement in Reliance Industries, IOC, HPCL, BPCL and TCS contributed to low P/E stocks doing well in the last two months. In the same time-frame, ITC, Sun Pharma and Dr Reddy's contributed negatively for the high P/E stocks. In case of information technology (IT) stocks, TCS and Infosys have moved from high P/E last year to low P/E now as relative P/E for IT fell to record lows.
"While low P/E generally provides a downside cushion, earnings progression for the current set has also been better. Over the past 12 months, one-year forward earnings are up 9% for the low P/E set vs 2% for high P/E. As we reassess the categorisation every month, stocks move from high to low P/E and vice-versa. As of now, energy, IT and metals are 58% of the value market-cap. Corporate-focused lenders (public-sector banks, ICICI Bank, Axis Bank) and utilities form most of the rest," said Neelkanth Mishra, managing director and India equity strategist at Credit Suisse.
In the last 2-3 months, energy, IT and metals have driven positive returns, whereas some staples (like ITC) and pharma stocks have continued to underperform. "Oil-related stocks have done well because of low oil prices and stronger rupee against dollar. Pharma has their own set of problems, which is where they have seen some sell-off. Balance-sheets are also an important thing to see when somebody looks at value versus growth stock stories," said Vikas Gupta, CEO & chief investment strategist, OmniScience Capital.
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