These good quality stocks are cheaper than Govt bonds - Views on News from Equitymaster

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  • Mar 23, 2012 - These good quality stocks are cheaper than Govt bonds

These good quality stocks are cheaper than Govt bonds

Mar 23, 2012

Can a stock be valued cheaply than a bond? Or for that matter a Government bond? Looks unlikely, isn't it? After all, a good quality stock will continue to raise its earnings for many years into the future. But a bond has no such possibility. Its coupon payments will remain as similar five years down the line as they are today.

Thus, it goes without saying that stocks will continue to trade at lower yields than Govt bonds or in other words, will command a higher P/E.

However, as we all know, markets don't operate with robotic precision. A lot of times, stocks, even good quality ones, start to trade at prices that make them more attractive than Government bonds.

Clearly, what better opportunity for a value investor to fish in a sea of such stocks? Not only are these stocks good quality but they also have a margin of safety in the sense that they are available at lower or at par valuations of Government bonds.

In our view, stocks that are currently available at a P/E of 10 or less are the kind of stocks that could qualify for the criterion mentioned above. Why a P/E of 10? Well, a small Google search will tell us that a 10-year Indian Government bond currently trades at a yield of around 9%.

Thus, a stock with a P/E of 10 or less is the one that is trading lower than the bond. Besides, it is also important that the stock be of good quality i.e. have a D/E ratio of no more than 0.5 times so that the chances of the same going bankrupt or the stock turning into a value trap is minimized to the best extent possible.

The table shown below indicates the stocks from the mid cap universe that are not only good quality (D/E of less than 0.5) but are also trading at attractive yields.

Good quality Mid Caps cheaper than Government bonds...
Company nameTrailing 12 month P/ETotal D/E
Gujarat Narmada Valley Fertilizers Company Ltd.3.600.50
Gujarat State Fertilizers & Chemicals Ltd.4.610.14
Clariant Chemicals (India) Ltd.5.680.00
Glodyne Technoserve Ltd.6.840.29
Educomp Solutions Ltd.6.860.42
Gujarat Fluorochemicals Ltd.7.790.33
Housing Development & Infrastructure Ltd.8.070.45
Maharashtra Seamless Ltd.8.180.04
Polaris Financial Technology Ltd.8.350.00
Birla Corporation Ltd.8.940.50
Graphite India Ltd.9.120.19
Kalpataru Power Transmission Ltd.9.520.28
MOIL Ltd.9.770.00
Source: Ace Equity
It should be noted that the stocks listed above can only be a good starting point to start one's research from. Investing only on the basis of criteria given above and doing no further research may not achieve the desired results according to us.

Rahul Shah

Rahul Shah (Research Analyst), Managing Editor, Microcap Millionaires has led the team from the front in developing some of our most stringent and rewarding research processes. As per his own admission, the turning point in Rahul's life as a financial analyst came a few years back when he got introduced to the works of Warren Buffett and Charlie Munger. From Buffett, he understood the value of investing in good quality business with powerful moats and strong management teams. Charlie Munger on the other hand inspired him to be a lifelong learner and use mental models in order to arrive at the crux of matters across most disciplines. Rahul firmly believes that in order to be successful at investing, you have to do the big things right and possess a great temperament and a contrarian streak.

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3 Responses to "These good quality stocks are cheaper than Govt bonds"

kiran

Apr 1, 2012

P/E is 5.69 check it at
moneycontrol (stock quotes)

Like 

Nikhil H Shah

Mar 25, 2012

When you click on Clariant Chemicals, it shows a PE ratio of 27.62 whereas in the article it shows 5.68.

Please clarify.

Thanks,

Nikhil

Like 

Dinesh

Mar 24, 2012

I clicked on Clariant Chemicals and it shows P/E ratio as 27.62, five times 5.68 shortlisted as cheaper stocks than govt bonds.

Can you confirm which one of the two is close to actual.

Regards,
Dinesh

Like 
  
Equitymaster requests your view! Post a comment on "These good quality stocks are cheaper than Govt bonds". Click here!

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