Bargain Hunt | These 36 high-quality stocks are available dirt cheap

From Benjamin Graham to Raamdeo Agrawal - value investors across the world believe the best way to make money in the market is to buy quality stocks at cheap prices. And, wait for them to appreciate.

However, ‘quality’ and ‘cheap’ are abstract notions and can barely be used to pick stocks if not quantified. Analysts have devised ways to solve this problem.

Quality can be quantified in many ways. One of the ways is to see how a company has been delivering returns on equity (RoE) and returns on capital employed (RoCE). Most analysts agree that anything above 20 percent for both metrics is excellent.

To quantify cheap-ness, analysts primarily use price to earnings (PE) ratio. It basically tells you what is the price that investors are willing to pay for every rupee of net income of a company. What is the right PE depends on sector and business types, but as a thumb rule anything below 20x is considered cheap.

In our analysis, we applied the following filters on all BSE-listed companies: Above 20 per cent RoCE and RoE in FY19-21 period, as data for FY22 was not widely available yet. For PE ratio, we went extra conservative, and filtered out all names that were trading above 15 times.

We were left with 36 stocks across industries and market capitalisations. What is more, most names are trading down up to 70 per cent from their 52-week high levels thanks to ongoing correction in the market, giving an opportunity to enter at a discount.

Most names are from smallcap space, with a few – especially state owned stocks Coal India and Hindustan Aeronautics – from largecap space. Besides them, some of the names are Petronet LNG, OFSS, Sun TV Network, ICICI Securities, Gujarat State Petronet, GR Infraprojects, Mahanagar Gas, Glenmark Life Sciences, HG Infra Engineering, and Kaveri Seed Company.

RoE-data

Should you buy these stocks?

“With valuations reaching fair levels, investors can buy high-quality stocks in a calibrated manner,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services. “Stocks that FPIs (foreign portfolio investors) sell like financials and IT are good segments to bet now." Oracle Financial Services Software (OFSS) is the only stock from these two sectors in the list.

Analysts also caution that it is good to filter stocks using RoE and RoCE but they should also gauge companies on other parameters including management quality, cash flow, liquidity, growth opportunity, etc. before deciding to invest in them.

Some of the stocks in the list have seen heavy buying in recent years, largely on improving earnings outlook. For instance, Coal India has gained prominence thanks to increasing cola prices and rising demand for the commodity. ICICI Securities sees 25 per cent upside from current levels in the stock.

On a few names, analysts are increasingly becoming bearish, which also explains recent selling in them. ICICI Securities is one such name. CLSA earlier this week downgraded the stock to underperform and cut its earnings outlook.

There are some stocks in the list that have a market-cap of less than Rs 1,000 crore but can be further analysed for investment, especially on management quality and business outlook. Some of these names are Associated Alcohols & Breweries, Shri Jagdamba Polymers, Gujarat Themis Biosyn, Likhitha Infrastructure, Eldeco Housing & Industries, Mangalam Organics and Tanfac Industries, among others.

It is true that many investors, for instance Abakkus’ Sunil Singhania, who invested in chemical stocks when they were trading at 5x PE, have made real money by investing in smaller companies but analysts say investors should be cautious and do their due diligence. They are relatively riskier as there is no analyst commentary on them and can have very low liquidity in the market.

Disclaimer: This exercise is just for information purposes and is not investment advice. Investors should consult a financial advisor before buying or selling equities.