VALUE INVESTING vs. GROWTH INVESTING

By

TAMAL DATTA CHAUDHURI

                                                Principal & Professor, Finance and Economics

Value Investing and Growth Investing are terms used in the stock market for identifying stocks for investment purposes. There are quite a few ways one may define value investing. The first is where the ratio of Market Price to Book Value per share is less than one. That is, the stock’s intrinsic value has not been fully realized in the market. The second is where the excess return from a stock is greater than the value given by the Stock Market Line. Growth investing on the other hand is forward looking and identifies stocks which may be highly priced today, but the prospects for further growth are there. These are stocks whose ratios of Price to Earnings per Share are high, and much higher than value stocks. In the table below we list some value stocks and some growth stocks as per the above criteria.

Name of the company	Price/Book Value per Share	P/E ratio	Price movement in the last two months (Rs.)
State Bank of India	1.19	8.64	1557-1718 = 161
Larsen & Toubro	3.47	18.19	746-965     = 219
Reliance Industries Ltd.	1.87	13.05	822-884   = 62
Tata Consultancy Services	12.47	27.65	1842-2008 = 166
ICICI Bank	1.77	12.85	802-1020  = 218
ITC	12.08	34.94	297-342  = 45
Hindustan Unilever Ltd	48.04	36.88	595-609  = 14

In the last two months, both sets of stocks have experienced appreciation in price. However, ones with already high Price to Book Value has seen smaller gains. One should take into account sectoral perception also and the effects of other macroeconomic variables. TCS with high P/E ratio and price to book value has seen significant rise as exchange rate movement aided growth in its bottom line. There is room for further appreciation in price for SBI.

MANAGEMENT EDUCATION

By

TAMAL DATTA CHAUDHURI

PROFESSOR, CALCUTTA BUSINESS SCHOOL

Principal & Professor, Finance and Economics

According to Peter Drucker, Management as an area of study is a liberal art. It is liberal because it deals with the fundamentals of knowledge, self-knowledge, wisdom and leadership and it is an art as it involves practice and application. A management student is supposed to be able to read, write, express and be modest. Any person with basic education can read and write. But what I mean by ability to read is to understand the meaning of the subject being read and critically analyze the underlying theme. By ability to write I mean to put down in simple words the essence of what is to be conveyed. By express I mean the power to verbally explain in simple and cogent terms any idea, however complicated. By modesty I mean the power to listen patiently to anyone and then provide any input, whether in support or in opposition, in as simple terms as possible. There is no point in taking a position that “I am always right!” Management students should develop the ability to keep their ears and eyes open to new concepts, alternative viewpoints, different ideas, contrasting styles etc. They should be continuously studying various subjects as in earlier times when liberal arts used to be studied. Management students need to grasp many things, need to develop a holistic approach, need to develop a macro view, push boundaries of thought, recognize talent and skill and put them to optimal use.

I am told that companies recruit management graduates because of three things. First management graduates are exposed to a wide variety of subjects like marketing, HR, finance, business ethics, operations, leadership, quality management, information technology etc. This is the “liberal” part of management training. They need to study many things to be intellectually mature. Second, management graduates are exposed to case study based teaching. They are exposed to various real life situations and are expected to develop insight and analytical power. Third, management graduates are good at making presentations. This is what I meant by the ability to express and also be modest and a good listener.  

The additional thing that I feel management students should develop is the interest and inclination to read Annual Reports of companies, and not only the balance sheet. I recently read three books namely “In Search of Excellence” by Thomas J Peters and Robert H Waterman Jr.,            “Built to Last” by Jim Collins and Jerry Porras and “Blue Ocean Strategy” by W Chan Ki and Rene’e Mauborgne. The basic methodology of the three books has been to first read about various companies from their annual reports. This is the starting point. Company interviews came later. Any management graduate has to find out from the annual report of a company its “Mission” “Vision” statement, its core values, its various strategies, the change in focus over time, areas of emphasis etc.  The purpose of a management graduate is not to focus solely on the financials of a company.

MACROECNOMICS AND MARKET SENTIMENT

By

TAMAL DATTA CHAUDHURI

  Principal & Professor, Finance and Economics

By market sentiment we mean stock market sentiment as reflected in the level and movement in the Sensex in India and the Dow Jones Industrial Average in the US. By macroeconomics we mean various government policies, either monetary policies or fiscal policies, aimed at either controlling public expenditure, or taming inflation, or stabilizing the exchange rate, or changing the interest rates, or affecting the supply of money, or creating employment etc. The point that I am trying to make here is that macroeconomic policies get reflected in market sentiment and the mood of an economy about the macroeconomic environment can be gauged by the movement in stock market indices. Stock market indices are just not stock market sentiment barometers; over some period of time, they reflect the macroeconomic environment of the economy. One, however, needs to keep in mind that this observation is not valid on a day to day basis.

Figure 1

 To understand this let us turn to Figure 1. The green zig zag line is the movement in Sensex from 2007 onwards and the blue zig zag line is the Dow Jones Industrial Average (DJIA) over the same period. The trend lines also follow the same colour pattern.

Observe that both the Sensex and the DJIA fell sharply in the first phase from 2008 to 2009. However, due to proactive expansionary policy measures from the government of India, the Sensex recovered faster than the DJIA from 2009 to 2011. The slope of the green line is much steeper than the blue line.

The interesting part is from 2011 onwards. Whereas the Sensex has overall flattened out, the DJIA has maintained its steady upward movement. Actually after 2011, while the government of India withdrew the stimulus package, the US government continued with its low interest rate expansionary policy. Thus the internal macroeconomic environment gets reflected in market sentiment. Short term movements in the Sensex reflect immediate short term reaction to news which could also be macroeconomic in nature, both at home and abroad. A slightly medium to long term trend strengthens the association between macroeconomics and market sentiment.

RECENT SECTORAL PERFORMANCE AND FUTURE PROSPECTS

By

                                                           Dr. Tamal Datta Chaudhuri

                                                  Principal & Professor, Finance and Economics

The BSE Sensex is a measure of stock market sentiment in India. It is an index made up of 30 companies, chosen on the basis of their market capitalization. It is represented by various companies from various sectors. Thus movement in the Sensex over time and intraday merely reflects movement in prices of shares of the underlying companies that constitute the Sensex.

It is thus, perfectly possible, that the Sensex rises but the value of your portfolio does not improve at all or to that extent. This is because the Sensex is comprised of only a few companies, and even among them share prices of all may not rise on a given day. This brings us to the sectoral composition of the Sensex.

Figure 1

The sectors represented in the Sensex are banks like SBI & ICICI Bank, auto companies like Maruti Suzuki, Mahindra & Mahindra, Tata Motors, capital goods companies like BHEL, IT companies like TCS, Infosys etc. At a given period of time, not all sectors would perform equally. It depends on the macroeconomic conditions of India and also of the rest of the world. Domestic rate of growth and its pattern along with that of the rest of the world would determine which sector would grow and in turn would get reflected in the stock prices of companies from that sector.

Figure 1 shows contrasting performance of three sectors in India in the last one year, i.e. October 2012 to October 2013. Whereas the capital goods index (in brown) has continuously fallen, the IT index (in green) has increased significantly since May 2013. The auto sector has overall moved horizontally, at times picking up and at times falling.

It is interesting that sectoral performance reflects the inherent characteristics of the sector. Whereas the auto sector index reflects seasonal pattern of demand for this sector, the IT index is a reflection of the economic performance of the rest of the world. The capital goods index is a reflection of manufacturing sector slowdown of the Indian economy.