As the benchmark indices continue to hit their all-time highs and markets continue to witness a bull-run, the hunt to identify stocks with the potential to deliver good returns, while being simultaneously low on valuations, gets all the more difficult.
To simplify this dilemma on the investors’ part, we analyzed the 5-year financial performance of stocks with market cap exceeding Rs 1000 crore based on four parameters – price to earnings, topline, EPS, and CAGR price return.
PE, the most widely used valuation metric, plays a pivotal role in the stock screening process. Our selection pertained to companies where the current PE multiple is half of its five-year average.
Though 13 companies fulfilled the above condition, a closer look at their financials indicated inconsistency in their topline and bottomline. So, we refined our search further to include only those companies whose sales and EPS recorded a consistent performance in the period under consideration.
However, the share prices in case of these, in comparison, did not rally as much. Consequently, these stocks may witness a re-rating of their multiples in future.
Though good fundamentals ought not to be ignored, one needs to consider price performance, too. Therefore, by narrowing our selection, we came across only four stocks (Bannari Amman Spinning Mills,West Coast Paper Mills, Jamna Auto Industries, Jyothy Laboratories) which not only met all the above-mentioned criteria, but also delivered 5-year CAGR price returns above 20 percent, thereby outperforming the Sensex, whose CAGR return was 11 percent during the corresponding period.
On a cautionary note, investors must take into account the other valuation and operational metrics as well, since PE multiples can increase/decrease disproportionately in bullish/bearish market scenarios, respectively.