The first rule of trading, which everyone tries to follow or implement, is to buy at a lower price and sell at a higher price. But this is easier said than done.
It is difficult to time the market, which means it is hard to predict the bottom or top of the market. The same rule applies to stocks as well. To make the job simpler, Morgan Stanley in a recent strategy report highlighted 13 stocks in which growth is available at reasonable prices.
At a time when most companies are struggling to show a consistent growth track record, these 13 stocks are priced to perfection at current levels in comparison to their return on capital employed (RoCE). However, one should note that these are not 'buy or sell' recommendations from the global investment bank.
The list includes companies like Asian Paints, Bharat Petroleum Corporation (BPCL), Cadila Healthcare, Dabur India, Godrej Consumer Products, Havells India, India Oil Corporation, Infosys, ITC, JSW Steel, Petronet LNG, Indraprastha Gas and Mphasis.
Why is growth, EPS or RoCE so important?
Growth is a predominant factor why the stock price of a company rises or falls. This is the untold truth of the market. At the same time, efficiency of capital is equally important, which is measured by calculating RoCE.
Theory suggests that earnings per share is the portion of a company's distributable profit allocated to each outstanding share of common stock.
“Generally, any company with more than 15 percent EPS is considered to be a great investment bet. If the RoCE of the company also supports EPS, then the company will offer better returns,” Ritesh Ashar, Chief Strategy Officer at KIFS Trade Capital, said.
The second most important factor is efficiency, which is measured by capturing RoCE. Thus, a growing company with higher RoCE is a great recipe for identifying wealth-creating companies.
Theoretically, RoCE is a profitability ratio, which is used to find out how efficient the company is in generating profit out of the capital employed in the business.
“If the company generates economic profits, it means it is generating returns in excess of the risk free rate. In that case, it can be said the company’s existence is justified based on value addition to the economy,” Jimeet Modi, Founder & CEO, SAMCO Securities, said. “A growing company with higher RoCE is a great recipe to identify wealth creating companies.”
Both EPS and RoCE help investors find out the capability of a company, apart from long-term financial planning, experts suggest.
If RoCE is less than the amount at which the company borrowed the capital, then it is incurring losses. “Both these ratios indicate if the company is eligible to offer higher returns to investors or not. Looking at the above list, EPS is quite robust in the case of Infosys. Its RoCE is also constantly above 20 percent, which gives investors a thumbs up to buy the stock,” Ashar added.
Other stocks which he likes are Dabur, ITC, JSW Steel and Cadila Healthcare. “They all have a great EPS and RoCE record which makes them an ideal choice for investment purposes.”
Ashar said if one looks at the valuation of Tata Consultancy Services, its EPS has constantly increased over the years. “RoCE is above 30 percent, which makes it an attractive buy for investors. Same is the case with Maruti. Its EPS has seen a constant growth and also returns have been increasing.”
Modi of SAMCO Securities acknowledges that all companies listed in the table are reasonably priced, but added that the composition is little concentrated. “Financials like YES Bank and HDFC should be added to make it a more diversified portfolio.”
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