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Suresh Krishnamurthy

A `GROWTH & Value' portfolio of ten stocks picked in July 2004 by applying rigorous financial parameters notched up returns of 100 per cent in the past year. It outperformed major indices as well as most equity funds.

The 100 per cent return is slightly more than the 98 per cent returns registered by CNX Midcap 200, the best performing index over the past year.

Portfolio in 2004: Andhra Bank, Bharat Electronics, Heritage Foods, Maharashtra Seamless, Paper Products, Reliance Industries, Taj GVK Hotels, UTI Bank, Vesuvius India and Vijaya Bank.

Taj GVK Hotels registered the highest returns of 309 per cent over the past year. Paper Products gained the least at 39 per cent.

The average returns for the hypothetical portfolio invested equally in these ten stocks worked out to 100.6 per cent.

Growth and value: Value-investing refers to a strategy that picks stocks trading below their intrinsic value.

It is a high-risk strategy as it could throw up stocks that have been ignored by the market for a variety of reasons.

The risk involved could, however, be neutralised by adding stocks of companies with good earnings growth record.

Such a marrying of growth and value could prove rewarding for investors. As a few of the stocks offer value, it could protect investors in the event of a market downturn.

The momentum in earnings growth could, on the other hand, help investors beat the market when stock prices rise.

To identify such `growth and value' stocks, the following filters were used in 2004:

Price-to-earnings multiple of the stock should be less than that of the Nifty.

Price-to-book value of the stock should be less than that of the Nifty.

In the latest financial year ended, earnings growth should have been higher than ten per cent.

In each of the three years prior to the latest financial year, earnings growth should have been higher than ten per cent.

Barring banks, the proportion of long-term debt to shareholder funds should be less than one.

For banks and non-banking finance companies, capital adequacy ratio should be comfortable.

These criteria worked well in the past year. Using the same set of criteria, we have picked ten stocks for the following year.

Portfolio for 2005: Aarti Industries, Amtek India, Bharat Electronics, Navabharat Ferro, NRB Bearings, Orient Abrasives, Reliance Industries, Shasun Chemicals, Shriram Transport and State Bank of India.

Growth at a price: These ten stocks offer `growth' at a reasonable price to potential investors.

The price to earnings ratio of all these ten stocks was less than that of Nifty Index. Nifty's PE was 14.3 at the end of June 2005. On an average, the PE of this portfolio is one-third lower than that of the index.

In contrast to the lower valuations, the earnings growth record of these ten stocks has been impressive.

On an average, earnings growth in the 12-month period ended March 2005 has been about 35 per cent.

In the three previous financial years too, earnings growth has on an average been about 35 per cent.

The average return on net worth of these companies is also attractive at 24 per cent.

Seven of the ten stocks in the portfolio for the following years have a market capitalisation of less than Rs 500 crore.

Small-cap investing is riskier because of such factors as relatively low liquidity and possibly lower standards of corporate governance.

There is still a place for such stocks in a retail investor's portfolio. They offer potential returns that a large-cap stock cannot.

Besides, with India set to grow at a steady rate for a considerably longer term, the case for investing in small- and medium-sized businesses has never been better.

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