Indian Stock Market– Value+Momentum Strategy

As I have stated before, I have been more than inspired by Prof. Sanjay Bakshi’s work and talks. I am researching on a couple of methodologies suggested by Prof. Bakshi in this talk (a must must read, if you haven’t already taken a print out and penciled important points!). In this post, I will try to elaborate on the Value+Momentum strategy from that talk.

Value+Momentum – The theme of this approach rests on a hypothesis which states that the Market realises the value of a stock in a relatively short period of time. For example, if Stock A is quoting at say Rs. 50/-, but its intrinsic value is Rs. 150/-; the Market might ignore Stock A for 6 months, 1 year, 2 years but when it does realise the price of the stock is quoting far below its intrinsic value, the approach to intrinsic value from Rs. 50/- to Rs. 150/- happens in a relatively short time. This approach can be broken down into two parts:

a) Value Stock which can defined as per Graham parameters (low P/B, low P/E, sufficient Margin of Safety etc). However, if we monitor the momentum for this stock (say, by returns or volume), we can put in more money into the stock once the momentum starts increasing so that the absolute gain increases within a short period of time.

For example, if we have a Stock B which we think is a Grahamian stock and is languishing at Rs. 50/- for about 18 months now, although its intrinsic value is Rs. 200/-. If we were to monitor the momentum of this stock (in terms of increasing volume/sustained uptick in the stock), we can put in more money behind Stock B say at Rs. 75/- and/or Rs. 100/- and/or Rs. 125/- and achieve more absolute returns with a higher probability in a relatively short period of time.

b) An approach from ‘What works at Wall Street’ as well as Prof. Bakshi’s talk. Prof Bakshi says “We have a low PSR, we have a highly leveraged balance sheet, we have a low absolute stock price and there are multiple triggers out there”. In ‘What works on Wall Street’, the theme is Low PSR (as Value) + Highest One year returns (Momentum). Prof. Bakshi goes on to say, if there is any kind of corporate debt restructuring announcement on such stocks, and if the management is trustworthy enough, such stocks can generate very good returns in the medium to long term.

What are some of the stocks that we can look at for this strategy (I illustrate with strategy b)) I turn to the ValuePickr screener to come up with stocks which have a PSR < 1, D/E > 3, exclude Financial Stocks and look at decreasing debt y-o-y for the last couple of years  (the stock list is only indicative – lots of other research needs to be done before even thinking of investing in these stocks) –

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Debt2Equity_LFY Industry P2Sales
1 Beeyu Overseas 3.96 Trading 0.59
2 India Steel Works 21.93 Steel 0.66
3 Rama Phosphates 3.18 Fertilisers 0.08
4 Saurashtra Cement 16.88 Construction Materials 0.11
5 Spentex Industries 5.82 Cotton & Blended Yarn 0.18
6 Suryalata Spinning Mills 6.1 Cotton & Blended Yarn 0.32
7 Venus Sugar 3.26 Food & Beverages 0.18

Comments? Suggestions on the approach? Any nuances that we can add?


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  1. #1 by Excel.Monkey on January 30, 2011 - 2:51 AM

    What one needs to keep in mind in the Indian scenario is that most such stocks belong to fraud kind of managements

    Therefore, one also need to apply a screener for promoters as well


  2. #2 by Kiran on January 30, 2011 - 9:04 PM

    @Excel Monkey – I agree a 100% with you. The problem is, we don’t have a quantitative criteria to evaluate management and for most midcaps/smallcaps, Annual reports are really hard to come by. We need to rely on Google (in case, we are not able to do management visits et al) for any news on promoters.

    Alternatively, we can do what Graham did. Diversify in say 10 stocks using this approach. Overall portfolio return would be better. Thoughts?

    (I have personally benefited from this approach on Zydus, although am still kicking myself to have sold out early 🙂 Not to take away anything from your point as well as avoiding my survivorship bias, I think this approach has merits in the Indian Stock Market!)

    • #3 by nitesh on March 29, 2011 - 10:47 AM

      Hi ,

      price to sales ratio is a good approach but my concern is if we look at cyclical industries(sugar,steel,cement etc) we very often get good PSR depending upon it is in upcycle or downcycle.

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