Bottomline | Finding value in frothy markets

With indices scaling new highs it can be foolish to place big equity bets, but there are pockets of value if you look hard enough.

When Jamie Dimon sells shares in JP Morgan, Jeff Bezos in Amazon and The Walton Family in Walmart, you take note. Sobering comments on future returns from the sage of Omaha, Warren Buffett, and Berkshire Hathaway’s high cash pile don’t inspire much confidence in the market either. And with stocks like Nvidia adding record value in a session, there’s a fear of missing out (FOMO) as well as apprehension of getting caught on the wrong foot. At times like this, it pays to look for a margin of safety by hiding in value stocks.

We ran the numbers on the BSE-500 stocks and found 15 that purely on a set of pre-defined parameters offered some margin of safety. Whether they are investment worthy will require deeper analysis and we’ll leave that to investors to do their homework on that. The moot point here is that if you look hard enough, you’ll find value in any market, only in a frothy market the task becomes that much harder.

Cash being supreme for a business, we first sifted the set on cash flow yields—for the past fiscal and the first half of the current fiscal (as cash flows are disclosed only half-yearly). To our surprise, there are a good bunch of companies offering cash yields of over 5-6% on FY23 cash flows and annualized FY24 half-yearly cash flows. Some even offer double-digit yields. Here’s a glimpse of yields on the sifted 15.

If we look at some of these stocks from an FY25 price-to-earnings perspective too, some are not terribly expensive, though the growth question is an important one to factor in before venturing in.

There’s also a margin of safety in many, as they trade a decent discount to their 52-week highs. And that can be comforting to investors wary of catching tops.

The above is just an illustration of one way to go about scouring for value. However, much more homework needs to go into your investment decision and valuations should not be looked at in isolation. Growth prospects, quality of management, brand value and governance standards are just a few of the other aspects that require evaluation before you put your money in a stock. And if you aren’t cut out for this kind of work, speak to your investment advisor or invest in mutual funds.

Happy investing!