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Cover Story

HOW WE
DID IT
Heres how we applied 10
filters to identify value stocks
from the BSE 200 universe.

The Economic Times Wealth, May 18-24, 2015

FOCUS ON
LARGE CAPS

AVOID VALUE
TRAPS

REASONABLE
GROWTH RATE

200

171

104

We started with the 200 stocks in


the S&P BSE 200 index. Since it is
a large cap index, small and midcap stocks get eliminated.

To avoid value traps, only companies


that made profits during the past five
years were considered29 companies
fell out, leaving only 171 stocks.

STOCKS

Also, the RONW should be at least 15% to


ensure that only companies generating
enough profits are considered. 17 companies
moved out, leaving only 78 stocks.

STOCKS

RETURN ON
NET WORTH

78

STOCKS

The next filter was a debt to


equity ratio of less than 2. None
of the companies had a debtequity ratio of more than 2 so
all 78 stocks remained.

LOW DEBT
EQUITY RATIO

78

STOCKS

Next, only stocks that paid dividends


in the past five years and distributed
at least 10% of their profits as
dividend were kept20 companies
fell out, leaving us with 58 stocks.

DIVEDEND
PAYMENT
RECORD

58

While profits are


good, they must
justify the
investment in the
business. Only
stocks with at
least 10% ROCE
were kept8
companies fell
through, leaving us
with 95 stocks.

STOCKS

A good company can be a bad buy at


a high price. Stocks with a PE of over
20 were kept out40 high priced
stocks fell out, leaving us with 18
stocks.

REASONABLE
VALUATION

18

STOCKS

Another valuation metric is the


price to book value (PBV). The
PBV can vary greatly, so we
kept a liberal cut off of 5. Three
companies got dropped, leaving
us with 15 stocks.

NOT HIGH
PRICE TO
BOOK VALUE

15

STOCKS

Lastly, only stocks with


a dividend yield of at
least 1% were
considered. One
company moved out.
Leaving us with 14
value picks.

NOT LOW
DIVIDEND
YIELD

14

Of these, we have
analysed 10 stocks
for you in detail.
These 10 stocks have
been chosen on the
basis of analysts
recommendations.

STOCKS

BSE 200 index through 10 filters (see graphic). With the application of each filter, some
stocks dropped out. In the end we were left
with just 14 scrips. Of these 14 stocks, we
have looked in detail at the fundamentals of
the 10 scrips most recommended by analysts
(see tables).

Value versus price


The price-to-earnings (PE) and price-to-book
value (PBV) ratios are favourite tools of value
investors. But a low PE or PBV alone does not
make a value stock. In fact, such stocks could
well be value traps. Many PSU banks, leveraged enterprises and real estate companies

STOCKS

RETURN ON
CAPITAL
EMPLOYED

95

STOCKS

POSITIVE
OPERATING
MARGINS

103
STOCKS

03

Of these profitable
companies, only those with
at least 10% annualised net
profit growth were
considered67 companies
fell out, leaving only 104
stocks.

Next, only companies with


positive operating margin
were retained to ensure
that the net profit is from
business operations and
not from other incomes1
stock moved out, leaving
103 stocks.