Hug the bear: How to spot bargains, value in stocks now

It’s bear market once again. News headlines are talking about crisis in the market and investor wealth loss on a per-second basis since the start of New Year and the 2008 ghost returning.

Fear is growing with noises of unfavourable macro economic data like high inflation, low IIP numbers, rising current account deficit and scepticism on government initiatives.

While some macro variables are a matter of concern, it may affect different businesses/ companies differently.

Thus, correction across the market segment and especially across mid/small cap companies only spells opportunity for retail investors.

Sentiments and overreactions in the market have become the order of the day and it is only during such periods that we witness indiscrimination between the good and the bad (companies) and a complete disregard of intrinsic values of a company or its business.

So what do we get in a bearish environment? Real bargains and a lot of value. Value in select individual companies across different businesses/ sectors has emerged in different forms:

-Dividend yield in excess of 4%, in select firms in finance, sugar, textile, refinery, chemicals.

-Price to earnings (P/Es) multiples of less than 5-10 times, where there is reasonable certainty of sustainable earnings growth over the next few years.

Currently, these are observed in sectors such as  auto-components (expected growth from original equipment manufacturer and replacement demand), textiles (better demand environment globally and gaining competitiveness over China), ceramics, fertilisers & pesticides, bearings, select engineering companies, agro-processing, hatcheries and consumer durables.

-Attractive price to book value, especially in the case of a few public sector bank stocks at price/book value of close to 1x with large scale branch network, high mix of low-cost current account and svings account (Casa) deposits.

This could also be extended to mid-sized select NBFCs with high RoEs of over 16-18%.

-Hidden value in tangible assets: Select real estate companies owning legacy land parcels, that are likely to get monetised over time and where the market value is far higher (in some cases over 3-5x than the entire market capitalisation of a company).

Mumbai centric companies could be preferred in this case due to favorable demand-supply dynamics. This is in contrast to other real estate developers saddled with high debt and consequent balance sheet issues or ones that have overpaid for land cost in the past.

-Distress value: In a few cases, stocks are available at market caps equating 60-80% net cash in balance sheet, rendering the residual business/asset virtually free or going for a song! Some mid and small cap IT companies are now showing a third of their market cap in cash in the balance sheet alone.

Polyester film packaging companies that are currently witnessing a super cycle phase are available at less than P/Es of 3x.

Though this cycle is unlikely to last beyond 2-3 quarters, individual companies in this sector can roughly add equivalent of 60-80% of market cap in form of cash to their balance sheet.

The market caps of some holding companies are at more than the desired discount to those of their listed subsidiaries.

Needless to say, one needs to pay attention to other parameters like management commitment, corporate governance, business sustainability and cash flows, in addition to the above stated value gap that offers margin of safety in investing.

-Focus should be stock-specific and individual companies rather than taking a view on the market as a whole. In the short run, specific companies may be subjected to market volatility.

Such a correction or reality check may scare the majority, test the patience of seasoned and the conviction of wise.

In the long run however, when sanity and rationality returns to the market, it is the earnings growth and cash flow that determines the stock returns generated by a company.   

India is on sale. It is unfortunate that Indian retail investors have largely shied away from equities as compared to FIIs who have poured in more than $90 billion in the Indian market over the last decade or so.    

Inflation scare not-withstanding in the short run, India’s high economic growth rate in excess of 8% still offers better relative growth globally. And several businesses/companies will benefit from it, grow and scale-up to provide compounding opportunity.

The pendulum of the market swings from euphoria and panic causing exaggerations on either side. More so, in the current context of online information world and program trading that adds to market volatility and complexity in investing, the boom (rallies) & burst (corrections) phases of market have contracted or shrunk in time cycles.

What is feared as negative news may have been discounted by the market at a faster pace than before. There is certainty of a group of businesses or individual companies that shall pass this inflationary environment and come out stronger and better.

Treat the current phase as opportunity in crisis. Hunt for mis-appraised stocks and hug the bear.