Ten value for money stocks to buy right now 30stades stock market investment
There has been a sharp correction in stock valuation in the last few months due to a steady decline in stock prices. The benchmark BSE Sensex for example closed Wednesday with a trailing price-to-earnings multiple of 22X, down sharply from nearly 28X at the beginning of the current calendar year and nearly 31X at the end of September 2021. In the same period, the index price-to-book value ratio has declined from 3.8X at the end of September 2021 to 3.2X on Wednesday.
The current valuation of the index is broadly in line with its average valuation in the last ten years. The Sensex 10-year average trailing P/E multiple has been 22.6X on average while its P/B ratio has been around 3X on average.
This is one of the sharpest declines in the valuation of the broader market since the 2008 Global Financial Crisis.
Historical data suggests that the investors greatly increase their probability to make money when they invest during a period of low valuation and vice versa.
So while the index looks relatively inexpensive compared to its historical valuation, it's still expensive when weighed against its underlying return on equity (RoE). The index offers an RoE of 14.2 percent currently which gives a price to equity ratio of around 1.6X.
A stock is believed to be a value buy when the price to equity ratio falls below one.
In other words, the index has become fairly inexpensive in the last few months but it's still not a screaming buy.
However, there are quite a few stocks which have become far cheaper in the last few months. Here are the top 10 stocks whose price to equity ratio has fallen below one. In our analysis, we have considered the company’s average net profit and net worth in the last three financial years (FY22, FY21 and FY20) to smooth out the wide fluctuations in earnings during the period due to COVID19.
Many of these stocks are also dividend stocks with a very high dividend yield compared to the broader market.
1. The multinational lubricant maker Castrol India is the best value for money in our league table. The stock is currently trading at a P/E multiple of 14.9X against its 3-year average return on equity (RoE) of 49 percent. This gives it a price to equity ratio of 0.3, one of the lowest for the stock in more than a decade.
The debt-free company is fairly inexpensive with a P/B ratio of 7.3X.
2. Next on our list is the multinational food & dairy product maker Nestle India. The company - historically one of the most richly-valued stocks in the large-cap space – is currently trading at a P/E multiple of 74.3X based on its three-year average earnings against its RoE of 106 percent. This translates into a price to equity ratio of 0.7, the lowest on a historical basis. The company has faced margin and growth pressure in FY22 but these headwinds won't last long.
3. The automotive battery maker Exide Industries is next on our chart with a P/E ratio of 6.2X and a 3-year average RoE of 24.5 percent. This translates into a price to equity ratio of 0.25 for the stock, the lowest in many years. The stock also looks like a value buy with a price-to-book value ratio of 1.5X. The company's earnings have come under pressure from a slowdown in auto sales and high lead prices but things could improve going forward.
4. The mid-size tobacco maker VST Industries is next with P/E of 15.6X and RoE of 33.4 per cent. This translates into a price to equity ratio of 0.47, one of the lowest in many years. It's also fairly inexpensive with a P/B ratio of 5.2.
5. The natural gas company Gujarat State Petronet has a P/E of 9X and a return on equity of 26 percent. This translates into a price-to-equity ratio of 0.35, one of the lowest in many years. The stock is also a value buy with a P/B ratio of 2.3X.
6. The gold loan company Manappuram Finance is in the sixth place on our list with a P/E of 5.9X and RoE of 21.1 percent based on its finances for the last three years. This translates into a very low price-to-equity ratio of 0.28X, among the lowest in the retail lending industry. Its P/B ratio is also very low at 1.2X.
7. The public sector power project lender REC Ltd has a P/E of just 3X and RoE of 17.9X. This gives it an incredibly low price to equity ratio of just 0.17, among the lowest big companies. The company’s price to book value is also very low at 0.5X. Due to its low valuation, the stock also offers one of the highest dividend yields at nearly 13 percent making it a compelling value stock.
8. The public liquefied natural gas processor Petronet LNG also makes it to our list with a P/E of 11x and RoE of 25 per cent.
This gives it a price to equity ratio of 0.44, among the lowest in the oil & gas space, making it a value stock.
The stock is also fairly inexpensive with a P/B ratio of 2.8x. The company's earnings were under pressure in the last two years but are now showing growth and could rise from here.
9. The country's top steelmaker Tata Steel has a P/E of 8.2X and RoE of 20.1 percent based on its earnings in the last three years. This translates into a price to equity ratio of 0.44 for the company. Its price to book value is also fairly low at 1.6X which is among the lowest in the metal and mining space. The company is likely to face some earnings pressure in FY23 but most of the bad news is already priced in that makes it a good contra buy.
10. The public sector oil marketing company Indian Oil is last on our list with a P/E multiple of 5.9X and RoE of 16.7 per cent. This translates into a price to equity ratio of 0.35 for the stock, one of the lowest in the large-cap space. Its P/B ratio is also on the lower side at around 1.0. The company's earnings have faced headwinds from high crude prices in the last year but investors can expect them to improve in the next 12-months.
(Advice: This article is for information purpose only. Readers are advised to consult a certified financial advisor before making investment in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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