Investment-worthy value stocks see sharp dip, says ICICI Securities

The population of 'investable value stocks' largely comprises names related to financials, 'fossil fuel energy' and other materials

Brokerage ICICI Securities believes 'investable value stocks' are diminishing sharply and now largely comprise companies related to financials, 'fossil fuel energy and other materials.

The proportion of ‘investable value stocks’ within the top 1,000 universe has dropped sharply to 10% from 17% at the start of the calendar year 2023, as per its calculation. 

ICICI defines value strategy as picking stocks wherein the market is pessimistic about the growth prospects of a company to start with, while the fundamentals of the company remain robust amid improving near-term growth prospects.

For identifying value picks, ICICI Securities has applied a combination of: (a) unwarranted market pessimism as measured by our proprietary ‘market implied long-term growth value’ (MILTGV) framework; (b) earnings yield > bond yield; and (c) P/B ratio. 

""As the broader market rally continues, the number of stocks with the minimum quality attribute of trailing RoE > 14% and trading at earnings yield > bond yield, has dropped from 171 to 104 within the universe of the top-1,000 stocks by market capitalisation. Out of 104 companies, 73% have private ownership while 27% have government ownership," said Vinod Karki of ICICI Securities.

Percentage of investable value stocks within the top-1,000 universe drops well below the long-term median

Value traps are avoided by filtering out sharp earnings downgrades, or sharp relative underperformance while keeping a qualitative check in terms of a fundamental BUY rating.''

Avoiding value traps: Stocks are valued lower for various reasons related to uncertainty about their future fundamentals and the risk of buying into a ‘value trap’ always exists. Also, a value stock could be ignored for an extended period of time due

to behavioural biases resulting from emerging investment paradigms or themes recent example is of ESG risk exposure stocks becoming unpopular). 

Is the macro environment conducive for value stocks?

In an earlier report titled 'iLens Screener', the brokerage house had observed that the value factor started to outperform since FY21. It attributed this outperformance of the value factor to macro demand in the economy, which is largely emanating from sectors related to; (a) the investment cycle (includes the buoyant real estate cycle); (b) the credit cycle accompanied by the bottom formation in the NPA cycle and (c) buoyant demand and price realisation for commodities.

Value stocks  (including a few non-rated names) sorted in ascending order from ‘deep value to value’

"Stocks related to the aforementioned sectors are typically capital-intensive, cyclical and value stocks. Our back-testing indicates that as long as the investment, commodity and credit cycle continue to be robust, value stocks will have the necessary catalysts to keep outperforming. Pockets of discretionary consumption are also showing robust demand, but they typically fall under growth stocks," said Niraj Karnani of ICICI Securities.

Percentage of investable value stocks (EY>BY and RoE>14%) within large, mid, small and microcap universe

The brokerage has divided value stocks under its coverage universe into buckets of large-, mid- and small-cap stocks and sorted in ascending order from ‘deep value to value’.

In the large-cap space, ICICI Securities sees value in ONGC,  Coal India, NTPC, GAIL,  SBI, Axis Bank.

Sectoral Distribution of value stocks having EY>BY and RoE>14%