Say no to high-PE stocks like Adani; Check out these 3 undervalued stocks in 2023 (2023)

Walking from stand to stand, Rahul quickly found that most vendors are willing to sell their rose seeds around€100 pro package.

At that moment, Rahul noticed a shop full of people buying rose seeds on the other end. Surprisingly, the seeds in this store are much smaller, but they are sold€1,000 pro package.

Intrigued, Rahul asks why they are so much more expensive and yet in demand...

The shop owner explained that these seeds grow much faster than regular seeds and who knows, you might get multiple rose plants from one seed!

Excited, Rahul bought a packet of these tall growing seeds and went home and planted them.

Months pass and a small shoot emerges. Over the next few years, the shoot grew bigger and bigger, but unfortunately no rose has ever grown.

You're probably wondering why are we talking about rose plants?

The story could draw a parallel with a similar episode in the Indian stock market. How, you ask?

Here goes...

And the rose that never shows up could be the profit that the company rarely makes and isn't justified by its ratings!

PE: Pay more?

For the past few days, everyone and their grandma have been screaming from the rooftops about the risks of buyingHigh P/E (price to earnings) ratio stocks..

But why is the market suddenly waking up to this long-known fact?

Well, maybe it has something to do with a six-day market cap erosion of over€10 trillion (tn).

That's how much Adani Group shares have lost since the Hindenburg report was published on Jan. 24.

She accused the Adani group of fraud and market manipulation. Fresh blows against the Adani group continue to add up and shares have seen another sharp sell-off today.

And it's not just the Adani group that has suffered since then. The BSE Sensex is also down over 2.5% as this is the latest in a string of negative news pouring in for equity investors from around the world.

The Sensex gained just 4.4% in 2022. This was in stark contrast to the previous three years, when it was up an average of 17.3% year over year.

But for equity investors hoping for the Sensex to resume its bull run in 2023, the new year has unfortunately not started well.

The war in Ukraine has only worsened when the US and Germany agreed to supply Ukraine with the world's deadliest tanks, a move Russian officials have condemned as a "blatant provocation".

And while some people believe that India is the only bright spot in the world that will be least affected by a global recession, that remains to be seen.

The International Monetary Fund (IMF) is already anticipating some slowdown in India's economy in fiscal 2023, forecasting growth to slow to 6.1% from 6.8% during the current fiscal year ending March 2023.

And then, of course, investors were hit hard by the market crisis, as bad news poured in for India's richest man and his conglomerates.

In such an environment, how does a stock investor choose stocks in 2023?

One thing is for sure… you avoid high PE bearings at all costs!

For example, even after the massive slump in Adani Group share valuations, PE ratios are still insanely high.

Quelle: Ace Equity

So just keep an eye out for low PE stocks?

The price-to-earnings (P/E) ratio is one of the most popular ways to value a stock. As a rule of thumb, a low P/E is a sign of undervaluation, while a high P/E is a sign of overvaluation.

Unfortunately, such an approach of valuing a stock solely on the basis of the P/E ratio is not sufficient.

First, a P/E depends on the industry a company belongs to. Some industries have higher rates simply because they are in demand.

If you think about it, all the companies of Adani, be it gas, green energy, ports, electricity, etc., are engaged in industries that are in high demand or expected in the future.

And that's what the group's supporters felt warranted higher PEs. But as has been shown time and time again, investors tend to be willing to buy such stocks even as prices continue to climb higher.

Well, has this stock's growth really kept pace with valuations? Obviously not.

Let's take the example of Adani's flagship company, Adani Enterprises.

Simply put, a P/E of 307 would mean that Adani Enterprises' current market value is 307 times its annual earnings.

Hypothetically, buying the company's stock would recoup your initial investment in 307 years from all of the company's profits, assuming the company never grows in the future.

Well, as an investor, you're not going to put your hard-earned money into a stock that takes over 300 years to recoup your original investment.

By now it must be clear... The key here is growth, growth and more growth.

But how much a company will grow or is likely to grow depends, of course, on the vagaries of the market.

Unfortunately, as the Adani fiasco shows, markets often tend to get exuberant with this "growth picture," and it usually doesn't end well for investors.

But what if there was a way to factor in value for money while also factoring in growth potential?real data?

Luckily there is and it means thatPEG Ratio (Price/Earnings to Growth)

Using the PEG ratio to select stocks

The price-to-earnings-to-growth ratio, or PEG ratio, is a metric that helps investors evaluate a stock by measuring a company's market price, its earnings, andits future growth prospects.

Since growth is a key component of a stock's expected return, including the growth rate gives the PEG an advantage over the most commonly used alternatives.

To get PEG, you first divide a stock's price by its earnings per share (EPS), just as you would to get P/E.

Once you have the P/E ratio, divide it by the expected earnings per share growth rate over a given period of time.

growth companyprice-to-earnings ratios tend to be higher as investors are willing to pay more for potential growth. But how much should an investor be willing to pay for growth?

A "growth at any cost" approach can result in overpaying for even a great company. The PEG ratio can help an investor quantify a company's growth rate.

The PEG ratio also allows investors to see how cheap a stock is relative to its growth rate. All things being equal, a lower PEG ratio is better.

According to famed fund manager Peter Lynch, the growth rate should converge towards the stock's price, which is why it is claimed that 1 is a fair PEG ratio.

A stock's price to earnings ratio can generally be found in any analyst report or by a company that has made its own forecasts and forecasts.

As with any other valuation metric, it's a good idea for investors to use the PEG ratio along with other tools and also consider the balance sheet, debt burden, and cash flow that aren't reflected in the PEG ratio.

With that clear, let's look at 3 large-cap stocks with the best PEG (lowest price-to-earnings-to-growth) ratios to add to your watchlist in 2023.

Please note that the data source (PEG ratios) for these companies is from the 30th January 2023 issue of ET Wealth.

Nr. 1 Britannia Industries Ltd

Britannia is one of themleading food companies and the largest biscuit maker in India. The company hasa presence in more than 60 countries around the world.

Britannia's product portfolio includes biscuits, bread, cakes, rusks and dairy products such as cheese, beverages, milk and yoghurt.

For the past five years, the company has consistently reported higher sales, and markets expect this momentum to continue going forward.

The company has continued to widen the gap in terms of market share, gaining market share for ten consecutive years.

Britannia, which announced a joint venture with French cheesemaker Bel Group in December 2022, aims to grow its packaged cheese business fivefold to around€12.5 billion (bn) over the next five years.

The company's share price is up 23% over the past 12 months to a yearly high of€4,596 and low from€3.050.

At current market prices, the company's PEG ratio is 0.0, indicating that theStock is undervaluedaccording to this metric.

Nr. 2 Tata Power Ltd

Tata Power, India's largest integrated energy company, is heavily committed to green energy.

The company is already India's largest player in the renewable energy space in terms of its production capacity and the strength of its EPC contracts.

And intends to double its total capacity from 13.5 gigawatts (GW) in 2022 to over 30 GW by 2027. The company plans to invest over Rs 750 billion over the next five years.

This will increase renewable energy capacity from 32% to 60% by 2027 and 80% by 2030.

The company plans to install EV charging stations across India with an estimated 100,000 charging stations over the next 10 years.

To grow its solar procurement and construction (EPC) business, the company is constructing a 4 gigawatt (GW) facility with a capital expenditure of€30 Mrd. in Tamil Nadu.

The company's sales increased by 44%€77.2 billion in 2020€111 billion for the year ended March 31, 2022.

Net income rose 1,779%€27.8 billion from€1.4 billion in the same period.

Going forward, his expansion plans will increase his sales and profits.

Tata Power's stock delivered negative returns of 6% in 2022 and remained in consolidation mode after climbing nearly 300% in the previous two years.

However, the scenario of rising interest rates combined with highly volatile markets kept investors on the sidelines of the Tata Power counter over the past year.

#3 Indus Towers Ltd

Indus Towersis India's largest cell tower installation company with over 189,392 towers and 339,435 co-locations (as of September 30, 2022) and a nationwide footprint covering all 22 telecom circuits.

Indus Towers was formed through the merger of Bharti Infratel and Indus Towers, making it one of the largest telecom tower companies in the world.

In India, three out of five calls go through an Indus location.

The company's turnover has increased significantly in the last 3 years€67 billion in 2020€$277 billion reported for the fiscal year ended March 31, 2022.

Earnings have also held up, up 265%€17,4 Mrd. to€63.6 billion in the same period.

However, the company has reported weak results for three consecutive quarters.

For the quarters of June and September 2022, Indus Towers reported a decrease in net income of 66% and 44%, respectively, due to Indus Towers receivables from one of its major customers.

In December 2022, Indus Towers reported a loss of€7.1 billion after the company's success€Provisions worth 23 billion for bad debts.

The company had previously taken precautions€17.7 billion in the September quarter and€12.3 billion in the June quarter.

In the future, growing 4G volumes and new technologies such as 5G, artificial intelligence, robotics and the Internet of Things offer the company the opportunity to expand its offering.

The company also sees the tower network as a good solution for EV infrastructure and even advertising in the foreseeable future.

Over the past year, shares of Indus Towers have fallen 44%, resulting in its PEG to current market price ratio of 0.21.

And that's it…

These are the three large-cap companies with very low price-to-earnings-to-growth ratios. The PEG allows investors to better value stocks.

However, it is always advisable to use the PEG ratio along with other metrics and indicators to create an investment strategy.

Disclaimer:This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated byEquitymaster.com