Thematic | Contrarian Investing
India Strategy
Please refer our report dated
June 2017
Contrarian Investing – Quarterly Update
A review of our contrarian investment strategies
Our thematic strategy note on
Contrarian Investing,
published in Jun’17, gives a detailed
account of the subject matter. In this note, we have reviewed the performance of our
strategies. Also, since we use quarterly rebalancing to test our hypothesis, we have run the
th
updated quintiles as on 30 Jun’19 and present our key findings along with our top
contrarian bets.
Key takeaways from 1QFY20 quintiles
Please refer our report dated
April 2019
Our analysis suggests that, over a longer term, neutral-to-moderately popular
stocks deliver a significant outperformance, even bettering the performance of
the most popular stocks.
In 1QFY20, the most popular stocks performed the best,
beating the benchmark, whereas the neutral to moderately popular stocks
delivered the third best return.
Our findings prove that, over the long term, out-of-favor low P/E stocks deliver
disproportionate returns, significantly beating the benchmark.
In 1QFY20, high
P/E stocks performed the best, whereas low-P/E stocks came in second.
Similarly, out-of-favor low P/CF stocks deliver disproportionate returns,
significantly beating the benchmark. In contrast, the performance of high P/CF
stocks is dismal.
In 1QFY20, low P/CF stocks delivered the best returns, whereas
high P/CF stocks delivered the second best returns.
1QFY20 was characterized by the decent performance of the value quintiles (low
P/E, low P/B delivered second best returns, whereas low PCF came in first).
We also note that in some sub-themes, the returns from a quintile deviate from
the long-term pattern, as highlighted in our initial detailed note. However, this is
in line with the trends observed even in the long-term study – where returns
can deviate for a quarter or two, but over the long period, the hypothesis is
proven right. For example, in the Popularity theme, instead of Quintile-4,
Quintile-1 has delivered the best returns in 1QFY20.
Best delta: Consensus change from Net Sell to Net Buy
As part of our analysis, we
have divided BSE100 in 5
groups of 20 – Quintile-1
(Q1), Quintile-2 (Q2),
Quintile-3 (Q3), Quintile-4
(Q4) and Quintile-5 (Q5),
with Q1 composed of the
most popular stocks and so
on.
Our findings suggest that a simple strategy of investing in stocks for which
analyst consensus has changed from ‘Net Sell to Net Buy’ with a holding period
of one year has delivered 21.1% annual returns over the last 12 years.
Net Sell to Net Buy stocks for 1QFY20:
There were no stocks that satisfy this
criterion for this quarter.
Exit from list: United Spirits
and
ABB
have exited our list after completing 12
months. These stocks entered from ‘Net Sell to Net Buy’ in May’18 and
delivered (17.2%) and 27.8% returns in a year.
Gautam Duggad – Research analyst
(Gautam.Duggad@MotilalOswal.com); +91 22 6129 1522
Research analyst: Bharat Arora
(Bharat.Arora@MotilalOswal.com); +91 22 6129 1566
Investors are advised to refer through important disclosures made at the last page of the Research Report.
15 July 2019
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Thematic | Contrarian Investing
Top contrarian picks
We highlight our top contrarian Buy and Sell picks based on the various themes we
have covered in this note as well as in the past –
Popularity, Relative Valuations,
Net Sell to Net Buy, Consensus Sells.
Contrarian BUYs: Bank of Baroda, Siemens, NTPC, NMDC and ITC
Contrarian SELLs: Asian Paints, Havells, Britannia, Shree Cement and Cipla
Exhibit 1:
Performance of our preferred quintiles - Indexed Returns
650
500
350
200
50
Indexed Returns
Low PE
Neutral Stocks
Performance of different themes
Low PCF
BSE 100
584.1
550.6
498.8
337.8
Source: Bloomberg
Exhibit 2:
Top contrarian BUY ideas
Company
Bank of Baroda
Siemens
NTPC
NMDC
ITC
% of
Correction
12 month
Popularity
Buy/Hold from 52w
return (%)
score
high (%)
Ratings
3.8
80
-20
8
3.2
74
-10
24
4.9
100
-12
1
4.0
90
-11
7
4.6
93
-15
0
1 Yr Fwd
PE (x)
6.5
40.5
10.4
8.5
23.6
PE -
PAT CAGR
1 Yr Fwd PB - Prem/Disc
Prem/Disc
FY19-21E
PB (x)
to LPA (%)
(%)
to LPA (%)
-25.4
0.7
-17.8
340.4
-18.5
4.9
-20.2
16.4
-7.4
1.2
-4.2
14.0
-13.8
1.2
-10.5
-7.2
-8.5
5.2
-25.9
9.3
Exhibit 3:
Top contrarian SELL ideas
Company
Asian Paints
Havells India
Britannia Inds.
Shree Cement
Cipla
Popularity
Score
4.4
4.1
3.7
3.3
3.9
% of
Appreciation
12 month
Sell/Hold
from
return (%)
Ratings 52w low (%)
25
19
-2
33
32
27
49
6
-13
53
63
27
45
14
-12
1 Yr Fwd.
PE (x)
48.0
46.6
46.4
40.2
22.6
PE -
Prem/Disc
to LPA (%)
9.5
30.6
6.1
25.2
-7.7
1 Yr Fwd.
PB (x)
12.1
10.0
13.3
6.8
2.6
PB -
PAT CAGR
Prem/Disc FY19-21E
to LPA (%)
(%)
-4.8
11.8
30.1
25.7
-18.2
19.3
11.1
18.5
-21.6
19.9
Exhibit 4:
Performance of our Contrarian Buy and Contrarian Sell calls indicated in last quarterly update
Contra buys
TGBL
Ashok Leyland
HDFC Life
HPCL
Coal India
BSE100
Price Return
Contra Sell
Price Return
20.0
Axis Bank
-1.1
-11.2
Nestle
6.7
24.9
Havells
-4.5
8.4
Pidilite
-7.9
-3.7
M&M
-6.7
-1.1
BSE100
-1.1
Note: In bold, stocks which didn’t perform as per expectations, Source: MOFSL, Bloomberg
15 July 2019
2
 Motilal Oswal Financial Services
Thematic | Contrarian Investing
Contrarian Strategies
1
Popularity as the selection criterion
Does a stock’s popularity with analysts have a
meaningful impact on its performance?
2
Consensus Sell rating (%) as the selection criterion
Sell recommendations are not as common as
buy/hold recommendations, and possess scarcity
value.
3
Consensus Buy rating (%) as the selection criterion
With the scarcity value theme of consensus sell
ratings playing out well, we put to test the street’s
capability to predict the winners.
4
Consensus recommendation change from ‘Net
Sell’ to ‘Net Buy’
Valuation
1
2
3
P/E
P/B
P/CF
15 July 2019
3
 Motilal Oswal Financial Services
Thematic | Contrarian Investing
Neutral to moderately popular stocks (Q4) emerge winners
1
In our first note on the theme
‘Contrarian
Investing: It pays to be different,’
we had
demonstrated that over longer periods of time, neutral to moderately popular
stocks have performed the best – and results are independent of whether the
returns are measured on an average basis or a median basis.
Exhibit 5:
Stocks on which analysts are neutral to moderately positive have given best returns
600
Performance of different quintiles of BSE100 by popularity ( quarterly rebalance)
Most Popular(CAGR-12.2%)
Q2(CAGR-11.6%)
Q3(CAGR-6.7%)
Q4(CAGR-14.9%)
Q5(CAGR-5.8%)
BSE100(CAGR-10.6%)
537.5
481.3
348.5
344.4
200
Absolute Total returns(Average
)
0
236.9
199.3
400
Source: Bloomberg
Above exhibit can be read as follows:
INR1k invested in Quintile-4 in December 2006 would be worth INR5.38k today. Similarly, it can be read for other
quintiles.
Summary of the 1QFY20 performance of various quintiles:
Most popular stocks (Q1) was the best performing group, whereas the second
most popular stocks (Q2) was the worst performing group. Neutral to
moderately popular stocks (Q4) came in third.
Surprisingly, Q1 is the best performing quintile, followed by Q3, Q4, Q5 and Q2.
In our first note on this theme, we had highlighted that typically Q5 and Q3 are
the worst performers.
It is important to note that investing in stocks based on the popularity metric (in
Q4) would deliver the best returns over a longer period of time, though there
may be periods of underperformance on a quarterly basis.
Exhibit 6:
Most popular stocks delivered the best return in 1QFY20
Q1
Total returns
5.5
Q2
-11.4
Q3
2.1
Q4
-2.5
Q5
-3.7
BSE100
1.2
Source: Bloomberg
Also, it is important to highlight that the BSE-100 index is based on free-float market
capitalization, whereas our quintiles are equal-weighted portfolios.
In 1QFY20, a
BSE-100 portfolio with equal weights would have delivered returns of -1.9%.
Following a simple strategy of investing in Quintile-4 (neutral to moderately popular
stocks) could generate a significant alpha over the benchmark.
15 July 2019
4
 Motilal Oswal Financial Services
Thematic | Contrarian Investing
Our study had proven that the most popular (Q1) and the second-most popular (Q2)
quintiles have also beaten the BSE-100 benchmark returns. We have categorized
BSE-100 constituents in 60 winners and 40 losers.
Exhibit 7:
Updated BSE-100 constituents divided in five quintiles as per popularity
Q1
BJHI IN
NTPC IN
ICICIBC IN
LT IN
SBIN IN
HDFCB IN
FB IN
APHS IN
ARBP IN
ITC IN
CROMPTON IN
GRASIM IN
HNDL IN
EDEL IN
UPLL IN
TTAN IN
ADSEZ IN
PIEL IN
MM IN
PWGR IN
Q2
ONGC IN
SHTF IN
HDFC IN
IIB IN
NMDC IN
TTCH IN
PLNG IN
AXSB IN
RECL IN
COAL IN
NEST IN
MSS IN
MRCO IN
GAIL IN
MMFS IN
TATA IN
TPWR IN
TECHM IN
DABUR IN
BHARTI IN
Q4
HDFCLIFE IN
BRIT IN
TCS IN
BOB IN
HUVR IN
HMCL IN
TTMT IN
CLGT IN
DIVI IN
BJFIN IN
VEDL IN
ACEM IN
BHFC IN
HAVL IN
BIOS IN
ACC IN
BPCL IN
KKC IN
AL IN
SIEM IN
Q3
HCLT IN
EXID IN
MRF IN
RBK IN
APNT IN
CCRI IN
IHFL IN
CIPLA IN
KMB IN
TGBL IN
CDH IN
RIL IN
Z IN
VOLT IN
UTCEM IN
IOCL IN
MSIL IN
BAF IN
LICHF IN
INFO IN
Q5
SUNP IN
BHIN IN
HPCL IN
JSTL IN
GNP IN
GCPL IN
DRRD IN
PIDI IN
PAG IN
SRCM IN
EIM IN
BJAUT IN
LPC IN
YES IN
BHEL IN
BOS IN
DMART IN
WPRO IN
TVSL IN
PNB IN
Source: Bloomberg
Among the current constituents of BSE-100, we note that Quintile-4 (Q4) has
popularity score ranging from 3.44-3.74.
An important question remains unanswered.
Why does the quintile composed of
stocks that have low consensus ratings/popularity (Quintile-4) outperform all the
other quintiles, even bettering the performance of the most popular stocks?
This is because the investment thesis of the most popular stocks is quite popular,
making them more likely to be discussed in the market. And, as such, there are
fewer marginal buyers with time. On the other hand, neutral to moderately popular
stocks are usually neglected by the street and their drivers are evolving. As the
drivers evolve, there is a sudden surge in investor interest in such stocks, leading to
a spike in returns. Thus, the stocks that were previously neglected by investors
deliver significant outperformance.
15 July 2019
5
 Motilal Oswal Financial Services
Thematic | Contrarian Investing
On the other hand, the least popular stocks underperform. This is because the least
popular stocks have a lot of sell recommendations. Sell recommendations are not
popular on the street – only about 16% of recommendations are sell as against 60%
buy and 24% hold. So, they have scarcity value and are more likely to be acted on.
Exhibit 8:
Snapshot of Quintile-4 (neutral to moderately popular stocks)
Trailing PE (x)
Company
ACC
Ambuja Cem.
Ashok Leyland
Bharat Forge
Biocon
Bank of Baroda
BPCL
Britannia Inds.
Colgate-Palm.
Divi's Lab.
Havells India
HDFCLIFE
Hero Motocorp
Hind. Unilever
Cummins India
Siemens
TCS
Tata Motors
Popularity
Score
3.5
3.6
3.4
3.6
3.6
3.7
3.5
3.7
3.6
3.6
3.6
3.7
3.7
3.7
3.5
3.4
3.7
3.7
CMP
INR
1,576
214
85
462
253
126
346
2,780
1,138
1,612
711
482
2,569
1,713
756
1,231
2,108
159
Mcap
INR b
4.2
6.1
3.6
3.1
4.4
7.0
10.0
9.7
4.5
6.2
6.5
13.7
7.3
54.5
3.1
6.4
120.6
7.8
5-year
Avg.
34.1
37.3
98.4
35.2
40.0
22.5
12.8
58.6
46.1
36.0
45.4
56.0
20.7
52.7
32.5
43.5
22.7
25.5
PE
PAT (INR m)
FY19
10,764
12,450
20,381
10,440
7,432
4,335
85,279
11,564
7,451
13,283
7,915
12,768
33,849
62,630
7,226
8,939
316,420
-14,785
FY20E
12,473
13,249
17,505
10,824
11,366
37,358
87,960
13,945
8,112
15,549
9,932
14,890
31,654
70,837
7,918
11,574
328,409
45,205
PAT
CAGR (%)
ROE
(%)
FY19
10.8
6.1
26.2
20.6
13.2
0.9
22.6
30.2
50.1
20.6
18.7
20.3
27.5
85.0
17.8
11.2
35.6
-1.9
Prem/
Current Disc (%)
19.5
-42.9
28.4
-23.9
12.9
-86.9
20.3
-42.3
33.2
-16.9
74.1
229.5
9.9
-22.7
58.7
0.3
39.6
-14.2
31.3
-13.0
62.1
36.8
73.2
30.7
15.2
-26.3
64.1
21.5
29.3
-9.9
52.2
20.0
26.0
14.6
na
na
FY19E FY19-21E
15,852
21.4
14,947
9.6
15,688
-12.3
11,915
6.8
13,555
35.0
84,088 340.4
109,181 13.1
16,465
19.3
9,355
12.1
18,336
17.5
12,509
25.7
17,913
18.4
35,763
2.8
84,410
16.1
9,032
11.8
12,106
16.4
375,902
9.0
52,302
NA
15 July 2019
6
 Motilal Oswal Financial Services
Thematic | Contrarian Investing
Best delta: Consensus change from ‘Net Sell’ to ‘Net Buy’
We looked at instances of change in consensus rating from ‘net sell’ to ‘net buy’ over
2006-2019 across BSE-100 constituents. A change in consensus rating from ‘net sell’
to ‘net buy’ means a change in consensus rating from <3 to >3. We found that a
strategy of investing in stocks with consensus rating change from <3 (net sell) to >3
(net buy) yields better results than any other strategy discussed in this study.
Essentially, these are stocks that have been ignored, have negative news flow and
are battling short-to-medium-term challenges. Thus, typically they have consensus
popularity rating <3. However, marginal earnings surprise, an improvement in news
flow and beaten down valuations are some of the factors that result in popularity
scores moving closer and then upwards of 3 (net buy). These stocks are yet to
become over-owned/most popular names on the street (example, Quintile-1 of the
Popularity thesis discussed in earlier sections).
By investing in stocks for which consensus recommendation has changed from ‘net
sell’ to ‘net buy’ as soon as they have been upgraded, and then holding them for 12
months, an investor would have earned an average return of 21.1%.
Exhibit 9:
Indexed return over 12 months from ‘net sell to net buy’ change
125
120
115
110
105
100
t
t+1
t+2
t+3
t+4
t+5
t+6
t+7
t+8
t+9
t+10
t+11
t+12
Source: MOFSL, Bloomberg
Avg. Return of stocks(consensus change from Net sell to Net Buy)
121.1
Exhibit 10:
Returns have been significant across all years (2003-2019)
Average Returns
No. of companies
41
14
32.5
-5.7
8
11
25.7 42.1
2.5
37
17
26
22
21
17
9
24.3
17
7
10.9
3
11.8
10.9
4.0
79.3
20.0
25.9
-10.5
Source: MOFSL, Bloomberg
We highlight that the investment was made after the stock’s popularity rating
changed from -3 to +3, i.e., from ‘net sell’ to ‘net buy’ (and not ‘consensus buy’).
Qualitatively, it suggests that when consensus recognizes the changing fortunes of
an underlying business and upgrades ratings, it pays to be among the early birds in
15 July 2019
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 Motilal Oswal Financial Services
Thematic | Contrarian Investing
investing in such a business. Our study shows that returns earned from this strategy
are healthy even in absolute terms. However, one needs to be early to catch these
returns, certainly before the stock becomes a consensus buy and crosses a
popularity score of 3.5.
We applied this framework on BSE-100 constituents for this quarter, this quarter
no stock came up on this screen Below is a snapshot of stocks where the
consensus popularity score changed from <3 to >3, in previous quarter.
Exhibit 11:
Stocks where popularity has improved from <3 to >3 in 4QFY19
Company
Page Industries Ltd
Siemens
HPCL
Dec-18
2.93
2.95
2.92
Jan-19
2.93
2.95
3.13
Feb-19
3.67
3.05
3.24
Mar-19
3.50
3.05
3.24
Source: Bloomberg
United spirits and ABB has
exited our list after completing 12 months. These stocks
entered the ‘net sell’ from the ‘net buy’ stocks in May 18 and delivered (17.2) and
27.81% total returns in a year.
15 July 2019
8
 Motilal Oswal Financial Services
Thematic | Contrarian Investing
2
Consensus sells are significant underperformers
The underperformance of Quintile-5 (the least popular stocks) in the popularity
theme proves that owing to their scarcity value, sell recommendations can be quite
efficient in predicting the stock performance.
This scarcity value prompted us to look at consensus sell ratings in isolation. In our
note on
Contrarian Investing,
we had highlighted our finding that Quintile-1,
composed of stocks with the highest consensus sell ratings, underperformed the
market significantly. Thus, the consensus has been quite right in predicting sells.
This can have meaningful implications for investors who can short-sell stocks.
Exhibit 12:
Quintile-1, with highest consensus sell ratings, is the biggest underperformer
500
400
300
200
100
0
Absolute Total returns(Average
)
Performance of different quintiles of BSE100 by consensus sell rating ( quarterly rebalance)
Q1(CAGR-5.3%)
Q2(CAGR-11.5%)
Q3(CAGR-9.5%)
Q5(CAGR-13.1%)
Q4(CAGR-9.6%)
BSE100(CAGR-10.5%)
466.2
391.6
348.5
313.3
311.2
191.8
Source: Bloomberg
On the other hand, Quintile-5, composed of stocks with the least consensus sell
ratings, performed the best.
In 1QFY20…
Q1, with highest consensus sells, came in second last – it has been the worst
performing group historically.
Q5, with the lowest consensus sell ratings, came in first.
Q5 was the best performing group, followed by Q3, Q2, Q1 and Q4.
It is important to note that investing in stocks with the lowest consensus sell
ratings (Q5) would deliver the best returns over a longer period of time,
although there may be periods of underperformance on a quarterly basis.
Exhibit 13:
Quintile-1, with highest consensus sell ratings came in second last
Total Returns
Q1
-3.94
Q2
-1.96
Q3
-0.82
Q4
-4.04
Q5
0.76
BSE100
1.20
Source: Bloomberg
It is important to highlight that the BSE-100 index is based on free-float market
capitalization, whereas our Quintiles are equal-weighted portfolios.
In 1QFY20, a
BSE-100 portfolio with equal weights would have delivered returns of -1.9%.
We present below the snapshot of Quintile-1 of current BSE-100 constituents, with
the highest sell ratings and low popularity score.
15 July 2019
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 Motilal Oswal Financial Services
Thematic | Contrarian Investing
Exhibit 14:
Ten stocks with highest sell ratings in BSE 100 – Quintile-1 of Consensus Sell
theme
Company
PNB IN
DMART IN
TVSL IN
WPRO IN
BOS IN
LPC IN
YES IN
EIM IN
BJAUT IN
BHEL IN
Buy
3
6
8
7
1
17
16
16
18
7
Sell
20
11
23
22
4
20
20
17
20
12
Hold
8
2
12
20
4
10
13
12
16
15
% of Sell
ratings
65
58
53
45
44
43
41
38
37
35
Popularity
Score
1.9
2.5
2.3
2.4
2.3
2.9
2.8
3.0
2.9
2.7
Source: Bloomberg
The list is spread across different sectors with majority from Auto (4) and Banks (2),
along with one each from Capital Goods, Technology, Retail and Pharma.
15 July 2019
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 Motilal Oswal Financial Services
Thematic | Contrarian Investing
Consensus buys are not always great investments
3
To test the efficacy of consensus buy ratings, we repeated the analysis with buy
ratings (%), and found that consensus buys are not necessarily great investments.
Q4, the quintile with the second lowest (in terms of percentage) consensus buy
ratings, delivered the maximum returns! Q4 has been the frontrunner, almost
through the entire decade.
Exhibit 15:
Quintile-4 has been the best performer amongst all quintiles
650
550
450
350
250
150
50
Absolute Total returns(Average
)
Performance of different quintiles of BSE100 by consensus buy rating ( quarterly rebalance)
Q1(CAGR-10.7%)
Q3(CAGR-9.5%)
Q5(CAGR-5.5%)
Q2(CAGR-9.9%)
Q4(CAGR-14.6%)
BSE100(CAGR-10.5%)
550.4
356.7
348.5
327.3
310.5
196.0
Source: Bloomberg
So, contrarian investing does work with consensus buy recommendations, and in
fact, Q4 of popularity theme and consensus buy theme have several common
members amongst themselves.
In the quarter ended June’19,
Q5, with the lowest consensus buys, was the worst performer among all
quintiles. On the other hand, Q1, with the highest buy ratings, came in first.
Q2, with the second highest buy ratings, came in third.
Q4, the contrarian quintile for generating returns, delivered -1.7% returns.
It is important to note that Q4 of the popularity theme and the consensus buy
rating theme have several members in common. For more details, please refer
to our
first note
on the theme.
Exhibit 16:
Q5, with the least consensus buy ratings, performed the worst, whereas Q4
came in second
Q1
Total returns
4.3
Q2
-3.3
Q3
-5.0
Q4
-1.7
Q5
-5.5
BSE100
1.2
Source: Bloomberg
It is important to highlight that the BSE-100 index is based on free-float market
capitalization, whereas our quintiles are equal-weighted portfolios.
In 1QFY20, a
BSE-100 portfolio with equal weights would have delivered returns of -1.9%.
15 July 2019
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 Motilal Oswal Financial Services
Thematic | Contrarian Investing
Exhibit 17:
Ten stocks with highest BUY ratings in BSE-100 – Quintile-1 of Consensus Buy
theme
Company
HDFCB IN
ICICIBC IN
SBIN IN
NTPC IN
LT IN
APHS IN
FB IN
UPLL IN
ITC IN
HNDL IN
Buy
52
51
46
25
35
21
34
28
34
26
Sell
1
0
1
0
1
0
0
2
2
3
Hold
2
3
2
2
2
2
4
2
3
1
% of Buy ratings
95
94
94
93
92
91
89
88
87
87
Source: Bloomberg
15 July 2019
12
 Motilal Oswal Financial Services
Thematic | Contrarian Investing
Low P/E stocks outperform high P/E stocks
1
The most favored stocks by the market – the stocks with the highest P/E ratio –
deliver dismal returns. On the other hand, the least favored stocks – the stocks with
the lowest P/E ratio – are rewarded by the market.
The results of this quarter are on
departure from expected lines –with high P/E stocks performing the best and low P/E
stocks coming in second.
Exhibit 18:
Low P/E stocks outperform the market, whereas high P/E stocks fail to beat the market
650
550
450
350
250
150
50
Absolute Total returns(Average
)
Performance of different quintiles of BSE100
High PE(CAGR-9.5%)
Q3(CAGR-11.6%)
Low PE(13.5%)
Q2(CAGR-8.6%)
Q4(CAGR-6.5%)
BSE100(CAGR-10.5%)
486.0
395.2
348.5
311.8
279.3
218.9
Source: Bloomberg
Investors/analysts have consistently overvalued the favorite stocks and undervalued
the out-of-favor stocks! We repeated the same analysis with trailing multiples and
found that trailing multiples are better predictors of returns, generating significant
alpha over the benchmark, BSE-100.
Exhibit 19:
The results are better with trailing P/E ratio
650
550
450
350
250
150
50
Absolute Total returns(Average
)
Performance of different quintiles of BSE100
High PE(CAGR-5.7%)
Q3(CAGR-9.1%)
Low PE(15.2%)
Q2(CAGR-9.1%)
Q4(CAGR-6.8%)
BSE100(CAGR-10.2%)
584.1
337.8
296.7
296.8
226.7
200.2
Source: Bloomberg
Key updates from 1QFY20 on P/E quintiles
In the quarter ended Jun’19,
Q5 (quintile with lowest P/E stocks) performed the second best, beating the
benchmark. On the other hand, Q1, with the highest P/E stocks, performed the
best.
It is important to note that the quintile performance can depart from our
assertion that “low P/E stocks dominate other quintiles” in some quarters, but
15 July 2019
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 Motilal Oswal Financial Services
Thematic | Contrarian Investing
over a longer period, low P/E stocks should outperform other quintiles,
according to our detailed study over ten years.
Exhibit 20:
High P/E stocks delivered the best returns in 1QFY20
Total Return
Q1
5.96
Q2
-3.12
Q3
-3.29
Q4
-5.49
Q5
-0.68
BSE100
-1.88
Source: Bloomberg
It is important to highlight that the BSE-100 index is based on free-float market
capitalization, whereas our quintiles are equal-weighted portfolios. In 1QFY20, a
BSE-100 portfolio with equal weights would have delivered returns of -1.9%.
Low P/E stocks offer a higher dividend yield (2.9%) than the market (1.5%), which
acts as a support for the stock performance in a downturn. On the other hand,
stocks with high P/E ratios offer lower dividend yield (0.7%) than the market. Worse,
they fail to deliver growth they promise based on higher P/E ratios!
Exhibit 21:
High dividend yield supports performance of low P/E stocks in bear phases
%
Perfomance of Quintiles
Total Return
Price Return
15.2
Dividend Return
2006-2019(curr.)
12.3
10.2
9.0
9.1
5.7
5.0
0.7
Q1
8.0
9.1
7.4
6.8
4.9
1.7
1.8
Q4
Q5
2.9
1.2
BSE 100
Source: Bloomberg
1.1
Q2
Q3
Exhibit 22:
Snapshot of winners - low P/E stocks
Trailing PE (x)
Company
BPCL
Coal India
Hindalco Inds.
HPCL
Indiabulls Hous.
IOCL
JSW Steel
LIC Housing Fin.
NMDC
NTPC
ONGC
Power Grid Corpn
Shriram Trans.
Tata Steel
Tata Power Co.
Popularity
Score
3.5
4.2
4.6
3.4
3.9
3.8
3.3
3.8
4.3
4.9
4.4
4.4
4.4
4.1
4.1
CMP
INR
346
231
199
282
666
147
268
537
112
128
150
206
1,046
473
68
Mcap
INR B
10.0
21.2
6.4
6.4
4.2
19.8
9.4
4.0
4.9
18.6
28.6
15.9
3.4
7.7
2.7
5-year
Avg.
12.8
17.0
17.3
13.6
12.4
15.7
22.3
15.1
11.5
11.7
13.4
13.8
18.4
11.2
111.1
Current
9.9
9.0
8.4
7.3
6.3
8.4
8.7
11.5
7.5
11.1
7.0
8.6
9.6
5.6
8.5
PE
Prem/
Disc (%)
-22.7
-46.9
-51.5
-46.3
-48.9
-46.2
-60.9
-23.4
-35.0
-5.8
-47.3
-37.6
-48.0
-50.0
-92.4
FY19
85,279
174,630
54,957
66,906
40,905
172,739
76,390
24,310
47,789
117,253
348,309
100,335
25,640
101,390
5,710
Pat(INR M)
FY20E
87,960
174,715
43,745
80,791
34,354
160,442
49,732
28,151
38,442
135,241
356,409
109,532
26,169
76,638
11,750
PAT
CAGR (%)
FY19E FY19-21E
109,181
13.1
185,384
3.0
49,586
-5.0
85,843
13.3
36,499
-5.5
202,206
8.2
75,504
-0.6
32,217
15.1
41,142
-7.2
152,498
14.0
370,033
3.1
118,741
8.8
28,955
6.3
89,513
-6.0
13,090
51.4
ROE
(%)
FY19
22.6
66.0
14.5
23.9
26.6
15.3
24.4
16.0
19.3
11.0
16.5
17.7
17.6
17.3
3.6
Source: MOFSL, Bloomberg
15 July 2019
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 Motilal Oswal Financial Services
Thematic | Contrarian Investing
Exhibit 23:
Snapshot of high P/E stocks
Trailing PE (x)
Company
Asian Paints
Bajaj Fin.
Bharti Airtel
Britannia Inds.
Avenue Supermarts
Havells India
HCL Technologies
HDFCLIFE
Hind. Unilever
Lupin
Nestle India
Page Industries
Pidilite Inds.
Siemens
Shree Cement
Titan Company
UltraTech Cem.
Popularity
Score
3.9
3.8
4.1
3.7
2.5
3.6
4.0
3.7
3.7
2.9
4.2
3.2
3.3
3.4
3.2
4.5
3.8
CMP Mcap
INR INR B
1,360 18.6
3,378 28.9
356
27.0
2,780
9.7
1,359 12.5
711
6.5
1,024 20.2
482
13.7
1,713 54.5
762
5.0
11,679 16.1
20,592 3.4
1,186
8.9
1,231
6.4
21,383 10.9
1,101 14.2
4,564 18.1
5-year Avg.
58.4
39.0
96.6
58.6
113.0
45.4
86.1
56.0
52.7
55.5
67.3
75.4
54.2
43.5
56.7
57.7
42.3
Current
60.3
54.5
366.5
58.7
96.7
62.1
1015.9
73.2
64.1
56.3
69.8
58.3
63.0
52.2
79.9
86.2
50.9
PE
Prem/
Disc (%)
3.3
39.6
279.4
0.3
-14.4
36.8
1079.7
30.7
21.5
1.3
3.6
-22.7
16.2
20.0
41.1
49.5
20.2
PAT (INR M)
PAT
CAGR (%)
ROE
(%)
FY19
FY20E
FY19E FY19-21E FY19
22,119
22,695
27,626
11.8
24.7
39,950
50,619
61,672
24.2
22.5
-35,026 -27,512 -11,539
Loss
-5.0
11,564
13,945
16,465
19.3
30.2
9,025
11,319
14,738
27.8
17.6
7,915
9,932
12,509
25.7
18.7
101,230 109,093 127,894
12.4
25.7
12,768
14,890
17,913
18.4
20.3
62,630
70,837
84,410
16.1
85.0
10,546
14,996
19,402
35.6
7.7
17,217
18,901
21,911
12.8
48.5
3,940
4,303
5,182
14.7
50.8
9,428
11,046
12,788
16.5
24.4
8,939
11,574
12,106
16.4
11.2
12,605
12,197
17,693
18.5
13.6
13,908
17,506
22,831
28.1
24.9
24,347
39,508
50,821
44.5
8.9
Source: MOFSL, Bloomberg
15 July 2019
15
 Motilal Oswal Financial Services
Thematic | Contrarian Investing
Low P/B stocks dominate, but overall results mixed
2
Our empirical analysis suggests that high P/B stocks have delivered the best returns
over the last 10 years. However, low P/B stocks have dominated other quintiles for
significant part of the decade.
P/B
Exhibit 24:
Low PB stocks have dominated the other quintiles for a significant portion of the decade
500
450
400
350
300
250
200
150
100
50
Absolute Total returns(Average
)
High PB(CAGR-13.5%)
Q3(CAGR-9.5%)
Low PB(CAGR-9.4%)
Q2(CAGR-11.4%)
Q4(CAGR-7.0%)
BSE 100(CAGR-10.5%)
Performance of different quintiles of BSE100
486.1
383.7
348.5
311.3
308.9
232.4
Source: Bloomberg
We have repeated the same analysis with the trailing P/B ratio. The low P/B stocks
based on trailing BV did better than the low P/B stocks based on forward BV,
whereas the high P/B stocks did somewhat worse. Again, low P/B stocks led the
other groups for the majority of the decade and are the third best performing
group.
Exhibit 25:
Trailing P/B ratio also presents the same picture
550
450
350
250
150
50
Absolute Total returns(Average
)
High PB(CAGR-11.9%)
Q3(CAGR-6.8%)
Low PB(CAGR-10.7%)
Performance of different quintiles of BSE100
Q2(CAGR-11.1%)
Q4(CAGR-9%)
BSE 100(CAGR-10.5%)
399.4
380.0
352.6
344.3
313.1
234.4
Source: Bloomberg
In the quarter ended Jun’19…
Q1 (high P/B stocks) and Q5 (low P/B stocks) were the top two performers
among all quintiles, even beating the benchmark.
Q1 was the best performing group, followed by Q5, Q2, Q3 and Q4.
15 July 2019
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 Motilal Oswal Financial Services
Thematic | Contrarian Investing
Exhibit 26:
Low P/B stocks (Q5) have delivered the second best returns in 1QFY20
Total Returns
Q1
2.23
Q2
-2.23
Q3
-3.04
Q4
-6.70
Q5
1.23
BSE100
1.20
Source: Bloomberg
It is important to highlight that the BSE-100 index is based on free-float market
capitalization, whereas our quintiles are equal-weighted portfolios. In 1QFY20, a
BSE-100 portfolio with equal weights would have delivered returns of (-1.9) %.
15 July 2019
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 Motilal Oswal Financial Services
Thematic | Contrarian Investing
Low P/CF stocks outperform high P/CF stocks
P/CF
The least popular (out of favor) stocks with a low P/CF ratio outperformed every
other group, generating an alpha of 1.1% (returns CAGR of 11.3%) over the
benchmark (BSE-100: CAGR of 10.5%). High P/CF stocks also delivered decent
returns, beating the BSE-100 benchmark narrowly.
Exhibit 27:
Low P/CF stocks beat high P/CF stocks
550
450
350
250
150
50
Absolute Total returns(Average
)
High PCF(CAGR-10.8%)
Q3(CAGR-8.6%)
Low PCF(CAGR-11.3%)
Performance of different quintiles of BSE100
Q2(CAGR-9.9%)
Q4(CAGR-7.1%)
BSE 100(CAGR-10.5%)
383.3
361.3
348.6
326.7
281.1
236.1
Source: Bloomberg
We repeated the same analysis with the trailing P/CF ratios. The outperformance
increased with the trailing ratios. The low P/CF quintile outperformed every other
group. The high P/CF quintile delivered the least returns, failing to beat the
benchmark and underperformed every other quintile. This is in harmony with our
analysis on the P/E theme.
Exhibit 28:
Margin of outperformance increases significantly with trailing P/CF ratios
550
450
350
250
150
50
Absolute Total returns(Average
)
High PCF(CAGR-5.2%)
Q3(CAGR-11.6%)
Low PCF(CAGR-13.7%)
Performance of different quintiles of BSE100
498.8
394.0
378.8
348.4
288.8
189.2
Q2(CAGR-8.9%)
Q4(CAGR-11.2%)
BSE 100(CAGR-10.5%)
Source: Bloomberg
Key updates from 1QFY20 on P/CF quintiles
In the quarter ended Mar’19,
The low P/CF quintile (Q5) has performed the best failing to beat the
benchmark.
Q5 (Quintile with the lowest P/CF ratio) performed the best, followed by Q1, Q4,
Q3 and Q2.
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 Motilal Oswal Financial Services
Thematic | Contrarian Investing
It is important to note that the quintile performance can depart from our
assertion that “low P/CF stocks dominate other quintiles” in some quarters, but
over a longer period, low P/CF stocks have outperformed every other quintile.
Exhibit 29:
Low P/CF performed the best in 1QFY20
Total Returns
Q1
0.40
Q2
-2.97
Q3
-1.94
Q4
-1.79
Q5
1.01
BSE100
1.20
Source: Bloomberg
It is important to highlight that the BSE-100 index is based on free-float market
capitalization, whereas our Quintiles are equal-weighted portfolios. In 4QFY19, a
BSE-100 portfolio with equal weights would have delivered returns of (1.9) %.
The low P/CF stocks offer a higher dividend yield (2.6%) than the market (1.5%); this
acts as a support for the stock performance during a market downturn. On the other
hand, stocks with the highest P/CF ratios offer a lower dividend yield (0.8%) than the
market. Worse, they often fail to deliver growth that analysts envisaged for them.
Exhibit 30:
High dividend yield supports low P/CF stocks in bear market (%)
%
Perfomance of Quintiles
Total Return
11.6
8.9
Price Return
Dividend Return
13.7
9.0
2.2
Q4
Q5
11.2
2006-2019(curr.)
5.2 4.4
0.8
Q1
7.7
1.2
Q2
9.8
11.2
10.5
9.0
1.8
Q3
2.6
BSE 100
1.5
Source: Bloomberg
Exhibit 31:
Snapshot of low P/CF stocks
Trailing PE(x)
Company
HDFCLIFE
JSW Steel
Tata Steel
Tata Chemicals
Tata Motors
Vedanta
Popularity
Score
3.7
3.3
4.1
4.3
3.7
3.6
CMP
INR
482
268
473
600
159
168
Mcap
INR B
13.7
9.4
7.7
2.2
7.8
8.9
5-year Avg. Current
56.0
22.3
11.2
16.7
25.5
10.4
73.2
8.7
5.6
13.7
na
9.3
PE
Prem/
Disc (%)
30.7
-60.9
-50.0
-18.0
na
-10.2
PAT (INR M)
FY19
12,768
76,390
101,390
10,936
-14,785
67,450
FY20E
14,890
49,732
76,638
11,660
45,205
53,820
PAT
CAGR (%)
FY19E FY19-21E
17,913
18.4
75,504
-0.6
89,513
-6.0
13,937
12.9
52,302
LP
52,460
-11.8
ROE
(%)
FY19
20.3
24.4
17.3
9.3
-1.9
10.7
Source: MOFSL, Bloomberg
15 July 2019
19
 Motilal Oswal Financial Services
Thematic | Contrarian Investing
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Rating may undergo a change
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any brokerage and investment services provided by MOFSL, including the products and services described herein are not available to or intended for U.S. persons. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-
6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to
which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as
amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOFSL has entered into a chaperoning agreement with a U.S.
registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule
2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
For Singapore:
In Singapore, this report is being distributed by Motilal Oswal Capital Markets Singapore Pte Ltd (“MOCMSPL”) (Co.Reg. NO. 201129401Z) which is a holder of a capital markets services license and an exempt financial adviser in Singapore,
as per the approved agreement under Paragraph 9 of Third Schedule of Securities and Futures Act (CAP 289) and Paragraph 11 of First Schedule of Financial Advisors Act (CAP 110) provided to MOCMSPL by Monetary Authority of Singapore. Persons in
Singapore should contact MOCMSPL in respect of any matter arising from, or in connection with this report/publication/communication. This report is distributed solely to persons who qualify as “Institutional Investors”, of which some of whom may consist of
"accredited" institutional investors as defined in section 4A(1) of the Securities and Futures Act, Chapter 289 of Singapore (“the SFA”). Accordingly, if a Singapore person is not or ceases to be such an institutional investor, such Singapore Person must immediately
discontinue any use of this Report and inform MOCMSPL.
Disclaimer:
The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced
in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments.
Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be
suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient.
Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult
its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-
investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The
Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The
Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their directors and the employees may from time to time, effect or have effected an own
account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in
this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already available in
publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information
and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or
resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOFSL to any registration or licensing requirement within such jurisdiction.
The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm,
not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
The person
accessing this information specifically agrees to exempt MOFSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOFSL or any of its affiliates or employees responsible for any such misuse
and further agrees to hold MOFSL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263; Website
www.motilaloswal.com.
CIN No.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad(West), Mumbai- 400 064. Tel No: 022 7188 1000.
Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst: INH000000412. AMFI: ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate
Agent: CA0579 ;PMS:INP000006712. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth
Management Ltd. (MOWML): PMS (Registration No.: INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs,Insurance Products
and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. which is a group company of MOFSL. Private Equity is offered through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of
MOFSL. Research & Advisory services is backed by proper research. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no assurance or guarantee of the returns. Investment in securities market is
subject to market risk, read all the related documents carefully before investing. Details of Compliance Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.
* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company Law Tribunal, Mumbai Bench.
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