The ideal strategy would be to invest in companies ahead of the news which is looking undervalued based on Value methodology.
The quarterly result marks an important event for companies as it provides a glimpse into their business performance and further growth prospects.
Listed Indian companies will start declaring their April-June quarter results from the second week of July. For retail investors, the ideal strategy would be to invest in undervalued companies ahead of their result to reap the maximum benefit, said an Edelweiss report.
However, not everyone is proficient in deciphering tons of numbers that companies dump every quarter. Targeting those investors, Edelwise has created a screener and has released a list of 10 relatively undervalued and 10 relatively overvalued stocks.
“With a view to help investors make sense out of these numbers and further ease their evaluation process, we are making an attempt to integrate the power of mathematics and fundamental analysis,” it added.
According to Edelweiss, top 10 relatively undervalued stocks for the quarter (May-July 2019) include Colgate Palmolive India, Arvind, Shipping Corp., Gujarat Alkalies, Gujarat State Fertilizers, HUDCO, GHC, GIC Housing Finance, India Cements and Power Finance Corp.
The brokerage firm has introduced a new screener that pits Price to book value versus RoE screener. This screen follows the value investment philosophy. Comparing P/B and RoE helps identify companies that trade below the derived intrinsic P/B value, given a specific RoE.
The screen will help an investor looking at the book value and RoE as important criteria to determine the soundness of a company.
Using the criterion, the broker has also released the top 10 relatively overvalued stocks. They include Bajaj Finserv, Dalmia Bharat, Godrej Industries, Avenue Supermarts, Gillette India, 3M India, Coal India, Titan Company, Nestle India and Pidilite Industries.
According to Edelweiss, their underlying assumption here is that within an industry, firms tend to become more like each other (operational metrics). The purpose of such a comparison is to identify companies that trade below what the Edelweiss Quant Screener believes should be the intrinsic P/B value given their specific RoEs.
Screening criteria
Edelweiss Securities used companies in the following sectors: Agriculture and Chemicals, Auto, BFSI, Capital Goods, Cement and Construction, Consumer Durables, FMCG, IT, Logistics, Media, Metals, Oil & Gas, Pharma, Power, Real Estate and Telecom.
● Only those companies for which P/B and RoE are more than half and less than two and half times their sector median values have been included.
● Companies with positive YoY and QoQ RoE growth have been considered.
● Companies have been ranked on the basis of the ratio of “derived PB” to actual P/B multiple with the most undervalued getting the highest rank.
Note: As the estimates for Forward Book Value are likely to differ for various analysts, the P/B versus RoE model makes use of the latest reported book value.
