Is value investing dead? Not a chance

Siddhartha Bhaiya

Time and again in history, we have heard that the value investing has been dying, but every time value has roared back to give humongous returns to the investors. This time too it is not different. We know that the act of saving alone doesn’t create wealth, but investing does. And how much wealth is created depends on how it is invested! And, to create wealth, the investor needs to be a well-informed investor yearning to become a discerned investor.

Sectors go in and out of favour

For a discerning investor, it becomes imperative to follow a growth – driven investment philosophy. For instance, a multi-bagger strategy, deploying a combination of growth, contrarian and value picks, is always a win. A value investor whose value creation mechanics largely depends on his investing acumen or that of his advisor, should think of long-term value investments with a huge emphasis on identifying stocks with strong future growth catalysts.

As Warren Buffett has said: "The best thing that happens to us is when a great company gets into temporary trouble, a value investor should buy them when they are on the operating table."

One has to be a firm believer of market cycles and understand that as there are business cycles, the stock prices too are cyclical. This is very evident from the Nifty constitution across various time periods. Just consider: Nifty in 2000 was all about technology, media and telecom where these three sectors, put together, had a weightage of approximately 60 percent.

On the other hand, the Nifty in the period of 2008 to 2011 was about metals, real estate and infrastructure. However, these three sectors fell by the wayside over the next six to seven years.

If you looked at Nifty in 2016-2020, it was all about financials and consumption-oriented stocks where these two sectors, collectively, had a weightage of around 60 percent. Now, the question is, whether these two sectors will also fall by the wayside during the next bull run.

There is a strong rationale to believe that the leaders of the previous rally more often than not fall by the wayside leading to a change in leadership or sectoral rotations, the challenge is to get into a stock or the sector much ahead of the fundamental story playing out; if you are looking for multi-bagger returns.

Few common traits that one should see in the markets are:

• The best valued stocks are often valued at peak P/E multiples when they hit their peak EBITDA margins. Conversely, the stocks are valued at their least when their EBITDA margins are at their worst. And in this movement, from the least desired to the most loved stock, the prices often move upwards of 1,000 per cent.

• More often than not the markets also tend to speak of the highly valued stocks of the markets as 'Secular stories'. For example, in 2000, Unitech was a 'Secular Story’ as housing was something that we could not do without. In 2010, ITC was a ‘Secular Story’. In today’s times, Asian Paints is often heard as a ‘Secular Story’. We all know what happened to the earlier secular stories.

Paying the right price for a business, pays

Hence, it is always better to buy great businesses at a significant discount to their intrinsic values. An investor should always consider ‘value’ as the most important parameter for his portfolio selection. The best way to make money in stock markets is not to lose money and the chances for that become pretty slim; if one buys deep - value businesses.

A sensible businessman will never overpay for anything. The principle of value investing demands for such value picks across industries and also coupled with extensive in-house qualitative and quantitative research and analysis, rather than impulsive decisions, market movements or tips coming in from outside.

Finding businesses at valuations much lower than their intrinsic values across sectors is always based on the four pillars of valuation, such as operational strength, corporate governance and quality of management, promoter shareholding and funds flow and potential of growth and valuation. A wise investment advisor and a portfolio manager will always reckon these principles.

In terms of predicting growth, a targeted company has to be an industry leader in the particular sector or the sub - sector in terms of market leadership or cost efficiency and should have a visible consistent growth over the next three to five years. Further, it should have a strong and clean balance sheet and a good capital allocation track record. For instance, the right investor and a wealth creator will always tend to avoid Companies with excessive leverage.

To ensure value investing, it is always advisable to shortlist the universe of select stocks, analyse them from all perspectives including fundamental analysis, to market visits, to listening to management conference calls, to seeking views from the unlisted competitors and then find the moat of the business through Porter’s Five Forces model.

Considering the cash flow from operations is another strong parameter for business evaluation, as it helps assessing the true value of the company by giving an accurate sense of its profitability and cash flows. A company investing in its expansion with a good cash flow discipline is a gold mine for investing. If such a discipline is followed, the investor can become a strong advocate of value investing.

As George Soros rightly said, “If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring.”

Long Live Value Investing!

Siddhartha Bhaiya is Managing Director & Fund Manager at Aequitas Investment Consultancy Private Limited