Three stocks that pass the value investing test

‘The stock market is a device for transferring money from the impatient to the patient.' : Warren Buffett

The stock market is not a place for speculators and gamblers. Those who don’t understand the fundamentals of the listed companies they’re trading in will end up losing money.

So, it should be no surprise to hear the old stock market saying that more than 90% of traders lose money in the long term. We would go further and say that most of the remaining 10% don't make enough for a good lifestyle.

But it’s not a reason to be disappointed. There is a way to create significant wealth in the stock market in the long term. The method is value investing.

And that is at the heart of Buffett’s quote above.

The key to long-term wealth creation is finding value stocks and holding on to them for the long term.

So, how do you go about it?

In this editorial, we explain the steps to apply the principles of value investing and highlight three stocks from Equitymaster’s Stock Screener: Top Value Stocks in India.

Investing in value stocks

The idea is to buy stocks that trade at a significant discount to their intrinsic values – they are cheaper than their true value. Once you buy an undervalued stock, the stock price eventually rises towards its intrinsic value and makes a profit for you in the process.

Value investors calculate a company's intrinsic value using fundamental analysis. They arrive at a per-share estimate of intrinsic value. Then they compare this estimate with the stock price.

If the stock price is below its intrinsic value, they buy the stock. If it is above that, they sell.

The idea behind value investing is to buy stocks trading at a significant discount to their intrinsic value, usually more than 20%, i.e., when there is a big margin of safety.

So, if the estimated intrinsic value is ₹100 per share, value investors will buy it only if the stock is trading below ₹80. Once you buy an undervalued stock, the price will eventually rise towards its intrinsic value and make a profit for you in the process.

The same idea holds true in reverse when selling a stock. Value investors sell when they think the stock price is above what it should be worth i.e. when there is no margin of safety.

So, when value investors make their buy and sell decisions they disagree with the market's assessment of the stock. They’re contrarian by nature. They don't follow the crowd. They tend to buy when everyone else is selling and sell when everyone else is buying.

Value investors are active buyers during market crashes and bear markets. And they are active sellers during phases of high momentum and bull markets.

Value investing is one of the best ways to build long term wealth in the stock market. This investing style was developed by Benjamin Graham - the father of value investing- about 100 years ago.

The core idea of value investing, in Graham’s own words, is this: ‘An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.

The stocks that promise ‘safety of principal’ and ‘adequate return’ are called value stocks. These are shares of companies with superior quality fundamentals and decent growth prospects.

How to find value stocks

Value stocks are cheap stocks, usually trading at a low price-to-earnings ratio (PE ratio) and a low price-to-book ratio (PB ratio).

Of course, you can’t buy any cheap stock. The quality of the business matters. The quality of the management matters. Corporate governance matters.

However, all things being equal, the cheaper the stock, the better the long-term potential returns.

This is because the stock price of a company is forward looking. Everything in financial markets is about the future. Investors and traders in the stock market are constantly factoring in everything that could influence a company’s stock price.

So, if a stock is cheap, it means the market believes the company's future is not very bright.

In other words, the market has already factored in the bad news that is expected to come in the future.

This gives an opportunity to value investors. If the market has become overly pessimistic, then the stock price could be offering a margin of safety. It could be trading below the company’s intrinsic value.

#1 ONGC

ONGC is India's largest oil and gas exploration and production company. It's a dominant player in India's energy sector, contributing around 70-71% of the country's domestic crude oil production and about 84% of natural gas production.

The Maharatna PSU is vertically integrated across the entire oil and gas industry, involved in exploration, development, and production activities across basins in India.

ONGC also has an international subsidiary, ONGC Videsh, which explores and produces oil and gas in 15 countries, expanding India's energy footprint globally. Its Indian subsidiaries include Hindustan Petroleum Corporation and Mangalore Refinery and Petrochemicals.

#2 Coal India

Coal India, the state-owned coal mining company, is the world's largest coal producer. The company operates in 83 mining areas across eight states in India.

The company, along with seven wholly owned coal-producing subsidiaries and one planning and consultancy subsidiary, produces around 80% of the coal in India and accounts for about 75% of the supply to the country's thermal power generating capacity.

It's a Maharatna company, a privileged status conferred by the government of India to select state-owned enterprises to empower them to expand operations and emerge as global giants.

The company mines several types of coal that is supplied to power producers and steel manufacturers. With its market-leading position, the company sits on a huge pile of cash. It uses the cash reserve to pay dividends consistently.

Hindustan Zinc, a Vedanta Group company, is the world's largest integrated zinc producer and is amongst the top 10 silver producers globally.

The company supplies more than 40 countries and holds about 74% of India's primary zinc market.

The company also became the first Indian company to join the prestigious International Council on Mining & Metals (ICMM) in 2025.

Hindustan Zinc also launched EcoZen, Asia's first low carbon 'green' zinc brand, produced using renewable energy.

Important points to keep in mind

Investors can often mistake a bad-quality stock for a value stock.

If a company’s fundamentals are bad, then its stock deserves to be cheap. This is because the market demands the company turn around its performance before rewarding it with a higher valuation.

In other words, low PE stocks and low PB stocks probably deserve the low valuations.

It’s the responsibility of the value investor to determine the intrinsic value of a stock to a reasonable degree and compare it to the stock price.

Even then, the value investor should consider buying the stock only if there is a sufficient margin of safety, i.e. if the stock is trading about 20% or lower than the intrinsic value.

Investors should ask the following questions before deciding whether a stock is a value stock:

• What’s the potential growth rate in revenue and profits?
• Are the company’s margins improving or declining? Why?
• The company’s position in the industry?
• What are the return ratios?
• Is the operating cash flow stable and/or growing?
• What is the debt-to-equity ratio and the interest coverage ratio?

There are more questions that a seasoned value investor will have to answer but these are enough to get you started.

Investors should evaluate the company's fundamentals, corporate governance, and stock valuation as key factors when conducting due diligence before making investment decisions.

This article is syndicated from Equitymaster.com