Profitable but unloved by markets category of stocks are those which the market is not interested in even though they have been turning in the right numbers. We had discussed this category of stocks in the last issue of Wealth Insight also. Before investing in any one of these companies, the investor should do extensive research about them.
We have broadened the initial universe from which these stocks were picked: in our last issue, we had selected these stocks from the universe of large- and mid-cap stocks (according to Value Research's criteria). This time we expanded the initial universe to include all the stocks belonging to the BSE 500. Thereafter, some of the variables that we used for filtering included earnings per share (EPS), net worth, return on net worth and stock return.
Earnings per share. We chose EPS as our measure of profitability. We decided to choose companies which in the past five years have been able to increase their EPS at the rate of 20 per cent annually. However, we relaxed the criterion by allowing for a 10 per cent year-on-year dip in EPS during one of the past five years. Net worth. This is the value of the company that you as a shareholder can claim in case the company files for bankruptcy. We confined our selection only to those companies that have been able to increase their net worth consistently over the past five years.
Return on net worth. This is a measure of profitability: it is the ratio of net profit to the net worth (equity capital plus reserves and surplus). We narrowed down our selection to only those companies which over the past five years had an average return on net worth of 20 per cent.
Stock return. Here we were looking for companies that have not produced a stellar market performance. Therefore, we selected companies which have underperformed the Sensex. Over the last one year the Sensex has given a return of 22.03 per cent. We chose only those companies that have given a lower return.
Last month these filters had thrown up a set of 10 companies. This month they threw up a set of 15 companies. There were seven new additions. Two stocks - L&T and Chambal Fertilisers - which belonged to this set last month got eliminated this month because of an improvement in their market performance.