The debate between growth and value investing

Top value stocks in Indian markets


Submitted by TheIndiaStreet on June 12, 2007 - 6:44am.


By Sundaramurthy Vadivelu
The India Street

Introduction:

Before investing in any particular stock, one needs to know about the company, its business, key areas of strength, possible risks, top management, financial performance like book value, earnings per share, dividend yield etc. This is called ‘fundamental analysis’ and focuses only on the company fundamentals. It simply ignores the stock market conditions during that period. This is in complete contrast with technical analysis, which discounts all the factors while the market price is determined. In other words, the technical analyst believes that the company performance, business forecast etc. are always discounted by the market participants while trading the stock.

It is ultimately a personal choice. For an investor who can’t sit in front of a computer for hours to analyze the market and find the right stock to invest, be it short term or long term, fundamental analysis could be useful. Several financial newspapers publish the important data such as book value, earnings per share etc. along with stock quotes. This can be used for fundamental analysis.

Earnings of a company are very important to an investor. Once the company’s operations are stabilized and starts earning, it is reported to the stock exchanges. The audited results may also be published in popular newspapers. Good earnings are an indication of company performance and capital appreciation.

Earnings per share is a term that is used to reflect the earnings of the company for each outstanding share. ‘Outstanding’ means the shares that can be traded in the stock market anytime. This is arrived after deducting promotors’ shareholding, locked in shares, etc. from total number of shares. EPS is calculating by adding the total earnings for the previous 4 quarters and then dividing it by the total number of outstanding shares.

P/E ratio is another term that can tell the investor how much the market is willing to pay for the company’s earnings. It is simply the market price divided by the EPS.

The book value of a company is the company's net worth, as measured by its total assets minus its total liabilities. This indicates how much the company would have left over in assets if it went out of business immediately. As with EPS, book value per share is arrived at after dividing the book value as per last balance sheet by the total number of outstanding shares.

Price to book value (PBV) is the ratio between stock price and book value per share.

These two parameters can help an investor to identify “growth” and “value” stocks in the market.

Growth stocks usually have high P/E and PBV ratios, which means that these stocks are relatively high-priced in comparison with the companies’ net asset values. In contrast, value stocks have relatively low P/E and PBV ratios.

Most growth investors are willing to pay a fairly high price for a stock whose earnings they expect to go up higher. They aren't completely insensitive to price, but the question of whether a stock is cheap or expensive isn't the real question for them.

Value investors view cheapness as a major factor. They focus on stocks that are cheap. Just as growth investors are not totally insensitive to price, they are not completely indifferent to earnings progress. However, they are willing to sacrifice some earnings growth for the sake of cheapness.

The following tables give us “growth” and “value” stocks in Indian stock market.

Table 1: Companies with high P/E ratio

Some of these companies, such as Aban Offshore, Educomp Solutions, Glenmark Pharma and UTV Software have gone up by more than 300% in the last 1 year.

Table 2: Companies with high PBV ratio

We can once again see Aban Offshore, GMR Infrastructure, Educomp Solutions and Glenmark pharma in this list.

Table 3 : Companies with low P/E ratio:

While choosing a stock the investor needs to be aware of the current business conditions in the industry it belongs to.

Table 4: Companies with low PBV ratio:

Conclusion: The debate between growth and value investing has been going on for years. Both styles have their positives and negatives and need different requirements on investment research.

A truly diversified portfolio will have both growth and value stocks. In value investing, correct stock valuation as well as the right time of entry is very critical whereas in growth investing, it is essential to identify businesses that face little or no threat of erosion so that earnings growth of those companies is not affected.


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