Can a stock be valued cheaply than a bond? Or for that matter a Government bond? Looks unlikely, isn't it? After all, a good quality stock will continue to raise its earnings for many years into the future. But a bond has no such possibility. Its coupon payments will remain as similar five years down the line as they are today.
Thus, it goes without saying that stocks will continue to trade at lower yields than Govt bonds or in other words, will command a higher P/E.
However, as we all know, markets don't operate with robotic precision. A lot of times, stocks, even good quality ones, start to trade at prices that make them more attractive than Government bonds.
Clearly, what better opportunity for a value investor to fish in a sea of such stocks? Not only are these stocks good quality but they also have a margin of safety in the sense that they are available at lower or at par valuations of Government bonds.
In our view, stocks that are currently available at a P/E of 10 or less are the kind of stocks that could qualify for the criterion mentioned above. Why a P/E of 10? Well, a small Google search will tell us that a 10-year Indian Government bond currently trades at a yield of around 9%.
Thus, a stock with a P/E of 10 or less is the one that is trading lower than the bond. Besides, it is also important that the stock be of good quality i.e. have a D/E ratio of no more than 0.5 times so that the chances of the same going bankrupt or the stock turning into a value trap is minimized to the best extent possible.
The table shown below indicates the stocks from the mid cap universe that are not only good quality (D/E of less than 0.5) but are also trading at attractive yields. Good quality Mid Caps cheaper than Government bonds...
| Company name | Trailing 12 month P/E | Total D/E |
| Gujarat Narmada Valley Fertilizers Company | 3.6 | 0.5 |
| Gujarat State Fertilizers & Chemicals | 4.61 | 0.14 |
| Clariant Chemicals (India) | 5.68 | 0 |
| Glodyne Technoserve | 6.84 | 0.29 |
| Educomp Solutions | 6.86 | 0.42 |
| Gujarat Fluorochemicals | 7.79 | 0.33 |
| Housing Development & Infrastructure | 8.07 | 0.45 |
| Maharashtra Seamless | 8.18 | 0.04 |
| Polaris Financial Technology | 8.35 | 0 |
| Birla Corporation | 8.94 | 0.5 |
| Graphite India | 9.12 | 0.19 |
| Kalpataru Power Transmission | 9.52 | 0.28 |
| MOIL | 9.77 | 0 |
Source: Ace Equity
It should be noted that the stocks listed above can only be a good starting point to start one's research from. Investing only on the basis of criteria given above and doing no further research may not achieve the desired results according to us. Equitymaster.com
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