Brokerage ICICI Securities believes ‘investable value stocks’ are diminishing sharply and now largely comprise companies related to financials, ‘fossil fuel energy and other materials.
ICICI defines value strategy as picking stocks wherein the market is pessimistic about the growth prospects of a company to start with, while the fundamentals of the company remain robust amid improving near-term growth prospects.
For identifying value picks, ICICI Securities has applied a combination of: (a) unwarranted market pessimism as measured by our proprietary ‘market implied long-term growth value’ (MILTGV) framework; (b) earnings yield > bond yield; and (c) P/B ratio.
Percentage of investable value stocks within the top-1,000 universe drops well below the long-term median
Avoiding value traps: Stocks are valued lower for various reasons related to uncertainty about their future fundamentals and 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 resulting from emerging investment paradigms or themes recent example is of ESG risk exposure stocks becoming unpopular).
Is the macro environment conducive for value stocks?
In an earlier report titled ‘iLens Screener’, the brokerage house had observed that the value factor started to outperform since FY21. It attributed this outperformance of the value factor to macro demand in the economy, which is largely emanating from sectors related to; (a) the investment cycle (includes the buoyant real estate cycle); (b) the credit cycle accompanied by the bottom formation in the NPA cycle and (c) buoyant demand and price realisation for commodities.
Percentage of investable value stocks (EY>BY and RoE>14%) within large, mid, small and microcap universe
Sectoral Distribution of value stocks having EY>BY and RoE>14%