Investable Value Stocks’ Population Dwindles To Historical Low Within Mid/Small-Caps: ICICI Securities

ICICI Securities Report

The proportion of ‘investable value stocks’ (return on equity more than 14% and earnings yield more than bond yield) within the top-1,000 universe has halved to ~7.6%, from 15% over the last one year, largely led by micro-caps, small-caps and mid-caps in descending order (cycle low was made in Dec-17 at 6%).

However, proportion of ‘investable value stocks within large-caps remained steady, at 14%, over the past year. Our framework for identifying value stocks includes a combination of parameters that spots:

1. unwarranted market pessimism about ‘long-term prospects’ as measured by our proprietary ‘market-implied long-term growth value’ framework;

2. scenarios where earnings yield comes up above bond yield; and

3. attractive price/book ratios relative to the stock’s RoE profile.

Value traps are avoided by filtering out sharp earnings downgrades, or relative underperformance, while keeping a qualitative check in terms of a fundamental Buy/Add rating from our sector coverage team.

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