If you are looking to buy micro, midcap and smallcap shares, beware! Chances of you finding 'value' among investable stocks in this market is at historic low. ICICI Securities said the number of stocks with the minimum quality attributes such as trailing return on equity of over 14 per cent and value traits of superior earnings yield over bond yields has halved from 144 to 76 within the universe of the top 1,000 stocks by market capitalisation.
The drop, ICICI Securities said has predominantly been led by micro-caps (from 79 such companies to 32), small-caps (35 to 19) and mid-caps (16 to 11). The number of ‘investable value stocks’ within large caps has remained constant at 14, the brokerage said.
"The proportion of ‘investable value stocks’ within the top-1,000 universe has halved to 7.6 per cent, from 15 per cent over the last one year, largely led by micro-caps, small-caps and mid-caps in descending order (cycle low was made in December 2017 at 6 per cent). However, proportion of ‘investable value stocks within large-caps remained steady, at 14 per cent, over the past year," it said. ICICI Securities said its framework for identifying value stocks includes a combination of parameters that spots unwarranted market pessimism about ‘long-term prospects’ as measured by our proprietary ‘market-implied long-term growth value’; scenarios where earnings yield comes up above bond yield; and attractive P/B ratios relative to the stock’s RoE profile.
"Value traps are avoided by filtering out sharp earnings downgrades, or relative underperformance, while keeping a qualitative check in terms of a fundamental BUY/ADD rating from our sector coverage team," it said.
ICICI Securities said stocks are valued lower for various reasons related to uncertainty about their future fundamentals – the risk of buying into a ‘value trap’ always exists.
Also, a value stock could be ignored for an extended period of time due to behavioural biases stemming from emerging investment paradigms or themes (example is of ESG risk exposure stocks growing unpopular).
Hence, the key to value strategy is to minimise the said risks, ICICI Securities apply three factors: avoiding continued relative underperformance, avoiding sharp consensus earnings downgrade and fundamental 'Buy' or 'Add' rating from ICICI's sector analyst.
Based on these three criteria, it suggested 17 stocks that where it finds deep values. A total of 14 stocks have 'Buy' calls by ICICI Securities; 3 others are 'Add', the brokerage said.
South Indian Bank Ltd, ONGC Ltd, HPCL, Oil India Ltd, Karur Vysya Bank Ltd, CESC Ltd and PNB Housing are some of ICICI Securities' buy calls. State Bank of India, GAIL, Hindalco Industries, Gulf Oil, Axis Bank, Sun TV and NTPC are some other 'Buy' calls by ICICI Securities.