Is value the new mantra for portfolio growth?

Growth Stocks

Tesla’s stock has rallied 10 times between January 2020 and now, despite its recent fall which could be equivalent to GDPs of some countries.

Today, a Bitcoin is 8 times more expensive than what it used to be in January 2020.

Need more? Kokoswap, a cryptocurrency, recently generated 76,200% returns in 24 hours.

Please don’t read that again in disbelief! 

Recently, Nykaa became India’s 53rd most valued company on listing. A company that generates an annual revenue of Rs ~2,450 crore now has a market cap of over Rs 1 lakh crore.

And Paytm’s IPO has broken all previous records to become the largest IPO by a fintech company ever in the Asia Pacific region.

Looking at these data points, one may conclude all asset classes and all markets are in the bubble zone.

 But that’s one side of the story. We aren’t naysayers, after all. So let’s talk about the other side as well.

There’s a clear-cut divide between growth and value buckets.

Relative performance of S&P value vis-à-vis S&P growth index is at a two-decade low.

The combined market cap of leading automakers across the world is far lower than that of Tesla’s. Can’t they compete with disruptors?

If this trend is to correct, the growth bucket might have to correct significantly or the value bucket has to play catch up.

Speaking about Indian markets, value as a theme has underperformed broader markets here too. But the index performance doesn’t fully capture the true story.

The valuation gap is alarming and if we consider individual cases, the difference is starker.

Quant Value Fund

Conventional value indicators suggest that value stocks somewhat fall in the neglected territory today.

PE Ratio

Let’s take an example of the banking sector. Some public sector banks in India are valued at steep discounts as compared to their private sector peers.

Yes, there are reasons for valuation disparities but should the magnitude of discount PSU banks trade at today continue going forward? Especially when they have been witnessing tangible improvements of late and India is looking at an upturn in its capex cycle.

For instance, Bank of India has advances of Rs ~4.2 lakh crore on its books and loans on Kotak Mahindra Bank’s book are Rs ~2.35 lakh crore. Nonetheless, the market cap of Kotak Mahindra Bank is 16 times higher than that of Bank of India.

If we are really seeing any sunshine at the end of the tunnel on the NPA (Non-Performing Assets) front, then will a counter-corrective trend shape up sometime in future for public sector banks?

Time will tell.

Needless to say, none of the above is a recommendation and the only intent of such comparisons is to draw your attention to two poles of investment thesis.

Time to take value investing seriously?

The one word answer is, yes!

The success of your investment in a stock depends on the true potential of a company as well as the perceived potential of the company. Sometimes perception follows performance and vice-a-versa.

That’s why it’s extremely crucial to pay attention to value as a theme and recognize its role in your investment portfolio.

But when you think of value, you should treat it more like a 3D object than a 2D one. 

What is the difference between 2D and 3D value investing?

Just like any 2D object, which has only two dimensions—length and height, 2D value investing is concerned only with market value related statistical ratios and growth assumptions.

But in today’s day and age, where data and information flow quite seamlessly, the process of value discovery can’t ignore the 3rd dimension i.e. perceptions of investors. That provides depth to analysis and helps fund managers avoid value traps and also spot value early.

Quant Mutual Fund seems to be doing precisely that. It has launched a New Fund Offer (NFO), Quant Value Fund. Its approach to value investing is quite unique.

Growth Stocks

Quant Mutual Fund endeavours to classify stocks across buckets—ranging from the most neglected to most admired, using perception analytics.

Based on its proprietary predictive research framework, Quant Value Fund aims to buy stocks that are at an inflection point and are drifting away from the most neglected category.  

It intends to pop them off when they touch their inflection point and start drifting away from the most admired category.

For instance, what’s the most admired sector today?

Technology.

If a fund house believes positive investor perception about tech stocks has peaked out and the sector is sooner or later likely to run its course, it might reduce its exposure to tech stocks or in extreme cases may even bring it down to zero.

 Contrary to that, if its analytical tools find unpopular sectors, textiles and public sector banks for instance, may soon get out of the most neglected category, then the fund may scoop them up.  

Again, these are examples for your better understanding of the concept of perception analytics used in value investing and not recommendations by any means.

Key takeaways

In the age of Augmented Reality (AR) and Virtual Reality (VR), investors seem to be going away from the reality.

And the reality is that the divergence between growth and value is too extreme to ignore at this juncture.

Nonetheless, we can’t use age-old evaluation models to value stocks.

When you think of value investing today, it has to go much beyond a few academic concepts of ratio analysis and spreadsheet-based presumptive valuation models.

Predictive analytics based on market implied data is the way to go if you want to capture value and avoid value traps.

In case you want someone else to do this job for you, you may think of investing in Quant Value Fund.

And do pay attention to the risk factors if you decide to do so.

You may also like to read: Public Sector Banks: the joker in the pack?

Disclaimer: The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock or a mutual fund. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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