Hello and welcome. In this lecture we'll discuss about value stocks and growth stocks. As we go down the course, it will become clear why we are making this discussion. So, keep the suspense for a few minutes. A value stock is a stock that tends to trade at lower price relative to their fundamentals, thus making it appealing for value investors. On the other hand, a growth stock is a stock that is anticipated to grow at a rate significantly above the average of the market.

We take a look at how to identify value stocks and how to identify growth stocks. Now, as you proceed with this discussion, we will take some details to understand some fundamentals before the concepts will become completely clear. We start with value stocks. value stocks are identified by the fact that they have a low p e or low PB and they provide a high dividend and dividend yield before we proceed further, let us understand what is P, what is PV and what is dividend. We start with P P stands for price to earnings ratio. So, P measures the current share price of a stock relative to relative to its earnings per share.

P is used for valuing companies to find out whether they are overvalued or undervalued. That is a reason P is also known as price multiple or earnings multiple. In practical terms, p indicates the dollar amount an investor can expect to invest in a company in order to receive $1 of that company's earnings. So, if the P of a company is 20 it means that investor is willing to pay $20 for receiving $1 of the current earnings. Let's see how P is calculated. Suppose a company's stock price closed at 91.0 $9 Suppose the company's profit for the fiscal year was $13.64 billion.

Suppose the number of shares outstanding was 3.1 billion, then earnings per share EP s is equal to the profit divided by the number of shares. So in this case it is 13.64 billion divided by 3.1 billion, that is 4.40 dollars. So the P is the stock price divided by APS that is 91.0 $9 divided by 4.40 dollars, which is 20.70 x. So, we say that the company is trading at a price multiple of 20.70 X. A high p suggests that the investors are expecting higher earnings growth in the future compared to the companies with the lower p. a low p indicates that either the company is undervalued or that the company is doing exceptionally well, relative to its past trends. Piece Have 20 to 25 X is considered to be average fee.

So, the higher value than 20 to 25 X is considered to be high P and lower value than 20 to 25 X is considered to be low p. So, value stocks will typically have peas which are less than 20 to 25 X, but this will conclude our discussion on P. Next, let's see what is PB. So, what is PB PB is price to book value ratio. The price to book value compares the market value and the book value of a company. Now, market value we understand is the number of shares outstanding multiplied by the share price at any point of time. book value is the net asset value of a company. The formula for book value is total assets minus the intangible assets minus liabilities.

Intangible assets basically mean things like patents or brand equity etc. Stop With a PB of two means that the investor pays rupees two for every one rupee of the book value. PB can be calculated as share price divided by book value by number of shares outstanding. We have already seen the formula for book value. A low PB means that the stock is backed up by tangible that is saleable assets. A high PB indicates that investors have high expectations from this company.

Generally, a PB of 3.0 is considered to be an average value. Anything above 3.0 is considered high PV and anything below 3.0 is considered as low PB. With that we conclude our discussion on PV. Next we'll look at dividends. So, what is dividend? dividend is a payment made by a corporation to its shareholders.

Usually as a distribution of profits. So, when a company makes a profit, it normally pays part of the profits as a dividend. When a company makes a profit, it has choices. The choices are it can take the entire profit and distributed as dividend among the shareholders or it may keep the entire profit and use it for expansion or for RND etc, for the future in the company or it can take a part of the profit and distributors dividend and retain a part of the profit. As a terminology, it is good to know that the profits if they are retained by the company, it is known as retained earnings. There are many companies which retained earnings for a very long period of time.

One very big example is Microsoft. Microsoft never gave any dividends. They utilized all their profits to do further research and make new products and grow the company. When we talk about dividend we need to talk about dividend yield dividend yield allows us to compare companies of different sizes as it is expressed in a percentage. So, dividend yield is nothing but the dividend per share divided by the share price of the company. So, dividend yield formula can be stated as dividend yield is equal to dividend per share divided by price per share.

As an example, we can consider that a dividend is given by a company is $1 as the company's share price is $20 that dividend yield is $1 by $20 is equal to 5%. When we have dividend yield, it is easy to make a comparison now, the company may be paying $10 per share as a dividend. However, it may be the dividend yield of this company will be less than a company which is paying $3 per share as a dividend. If a company has a dividend yield of 2.5%, we consider that as an average dividend yield anything greater than 2.5% dividend yield is considered as companies with high dividend yield. Anything lower than 2.5% dividend read as considered as companies with low dividend yield. With this we conclude our discussion on dividends.

So, we have seen profit to earnings ratio, profit to book value ratio and dividend yield. We come back to where we started from. So, now we can understand value stocks identifiers that is what is low p low PB and high dividend. So, we understand that value stocks have low profit earning ratio, low profitable value ratio and high dividend at the opposite end of the spectrum is that growth stocks have high profit earnings yield ratio, high profit to book value ratio and low dividend yield. Let us create a formulation so that we can classify a stock as whether it's a growth stock or a value stock. Let's create a formulation for identifying growth stock and value stocks.

So, we take p if the P is between 20 to 25 we say it's Average P. If it is greater than 25 x, we say it's a high P and if it is less than equal to 20 x, we say it's a low P. Similarly for PB we say if it's between 2.5 to 3.5. we classify it as average PB. If it is greater than 3.5, we say it's a high PB, and if it is less than 2.5, we say it's a low PB. For dividend yield, we say if it is less than 2%, we say it's a low low dividend yield. If it's between two and 3%, we'd say it's a average dividend yield and if it's greater than 3%, it's a high dividend yield. If you notice, we are put the characteristics of value stocks on the bottom that is low p low PB and high de vie high dividend yield.

And we put the characteristics of growth stocks on the top that is high p high PB n, low dividend yield. Now we will make a scoring system. So if the stock has low p, low PB or high dividend yield, we will give it a score of one for any of these cases. Now, if we do Has average p or average PV or average divide any of these cases will give it a point to points. And for high p high PV or low dividend deal, we will give three points. We will score the stocks based on these three three parameters, that is p PV and dividend yield.

And let's see what is the score they get. We take the stock of HDFC Bank Limited, we find that the P for HDFC Bank is 31.28. I have taken this figure from a Economic Times website. So, this is a high p So, HDFC Bank scores are three on this count. Next we see the PB is 5.43. So, here also HDFC banks coarser 3.0.

Next we take the dividend yield it is 0.57% that is a low dividend yield. So, here HDFC Bank against quarter three so we get a score of three plus three plus three equal to nine for HDF. feedback. Now that we have seen how we will calculate the score, let us complete our formulation. So if the total score is less than equal to four, we will classify that as a value stock is the total score is greater than or equal to six then we will classify that as a growth stock. So, as HDFC Bank score is nine it classifies as a growth stock.

Now, let's take the case of us Okay, and then limited. Here we see that the P is 13.35. So it is low p, we find that the PB is 3.02. So it's average figure of PB so we'll give a score of two here. Next we find the dividend yield is 2.86%. So that is a average score of two.

So far, so clear, and we get a score of one plus two plus two is equal to five. So this is neither a value stock nor a growth stock. Now let's analyze the nalco stock search. Here we see that the P is 6.65. So clearly it's a low p, so we give a score of one. Next we see that the PB is 0.98.

So here again, nalco scores are one. For nalco, we see that the dividend yield is 10.75%, which is a high dividend yield, and so we give you a score of one. So the total score for nalco is one plus one plus one is equal to three. So clearly nalco is a value stock. So we summarize our analysis. So HDFC Bank, we saw that it's a high p high PB and low dividend yield.

So it's a growth stock. On the other hand, nalco is a low p, low PV and a high dividend yield. So it's a value stock, we could make a conclusion regarding Ashok Leyland, maybe it's not a growth stock or a value stock. We will make use of this knowledge of value stock and growth stock in the next lecture. Thank you for listening. See you in the next lecture.

Yo