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3 stocks that hold potential despite having low institutional ownership

Although ignored by institutional investors, these stocks can be rewarding for investors

3 stocks that hold potential despite having low institutional ownership

Institutional investors buy shares on behalf of their clients or members. These include mutual funds, hedge funds, pension funds, insurance companies, just to name a few. These investors are assumed to be more knowledgeable. A significant presence of institutional investors augurs well for any stock. But, having said that, it also means that the stock has already been discovered. Legendary investor, Peter Lynch, put emphasis on evaluating companies wherein institutions hold a low percentage of shares and believed that bargains could be found in companies neglected by Wall Street.

Working on the same lines, we have come up with three quality stocks having institutional holdings of less than 10 per cent. To check their quality, we have used various filters. The return on equity (ROE) ratio of these stocks have been more than 15 per cent in at least four out of the last five years. To keep a check on leverage and high-interest costs, the debt to equity ratio has been capped at less than one. Also, we have picked companies generating positive cash flows from their operations in the last five years. Further, these companies have increased their operating margin in the last five years, thus generating higher profits.

Filters used
Market cap more than 500 crore
ROE greater than 15 per cent in at least four out last five years
Debt-to-equity less than one
Cash from operating activities positive in the last five years
Operating margin increasing in the last five years

Tasty Bite Eatables
The company's business is divided into two segments. The consumer business manufactures and sells ready-to-eat and ready-to-cook Indian and Asian meals and exports its products mostly to North America, Europe and the Australian continent. On the other hand, its food services business - comprising frozen foods and sauces, to name a few - focuses primarily on the domestic front.

The company's main focus remains on the natural food industry in the US, which, is estimated by the management, to be a $120-billion industry. In addition, the export strategy applied for its ready-to-eat products has played a key role in the company's success. In the US and Canada, the average time spent on cooking food is comparatively low and hence, the market for ready-to-eat products is big and growing.

Over the last five years, the company has doubled its sales while increasing its operating margin and strengthening its domestic business by supplying to branded quick-service restaurant chains. In FY19, the company's ROE saw a little fall from the previous years' figure to 26 per cent as against well-above 25 per cent in the last five years.

The company has been a wealth creator for its investors, with an annual return of 75 per cent compounded in the last five years. But, it is available at a very high valuation of 77 times earnings.

Sharda Motor Industries
Incorporated in 1986, it is involved in manufacturing motor vehicle parts, such as suspension, silencer, exhaust pipes (80 per cent of revenues in FY19), car seat frames and seat covers (18 per cent of revenues) and other parts. The company caters to the leading OEMs, such as Hyundai, Tata Motors, Maruti Suzuki, etc. from its 13 dedicated manufacturing units and one research and development centre.

The company's strength in high-end technology has resulted in a continuous improvement its efficiency and profitability margin. Recently, it entered into a 50:50 joint venture agreement with EET GmbH to produce BSVI-compliant after-treatment exhaust systems required for commercial vehicles in India. This JV has provided a major boost to its production capacity, especially in line with BS-VI emission norms.

However, the automobile industry is now facing some major headwinds on the back of rising fuel prices, increasing insurance costs, and a slowing economy. Despite all these factors, the company has been continuously increasing its margin for the last five years, with its profit margin currently pegging at 14.6 per cent. Nevertheless, its stock price has fallen by 40 per cent over the last one year owing to these headwinds, but still has managed to increase its investors' wealth by 11 per cent compounded annually over the last ten years. The stock is now available at a cheap valuation with PE of less than 7x.

Garware Technical Fibres
The largest exporter of sports articles in India, it supplies the nets used in major sporting events around the world, including Wimbledon, Irish Football and English Premier League championship. Besides, the company is the largest player in the Indian fishing nets market, with a market share of 65 per cent. Also, it is a leading name in the technical textile space as well.

Since its inception in 1976, the company has been paying dividends regularly. Over the past few years, it has revamped its product portfolio and strengthened the distribution network abroad. These two moves have led to an increase in the share of exports in its revenue.

Also, the company has focused on reducing its costs and inefficiencies, which have resulted in a two-time increase in its operating margin over the last five years.

In terms of financials, its ROE stood at 21 per cent as of FY19 and profits have grown at a rate of 36 per cent compounded annually over the last five years. And so has been the stock performance, which increased its investors' wealth at a rate of 48 per cent annually in the last five years. Stock is currently available at a PE of 21x.