Fundamental & Technical Analysis of Stocks - Peers & Comparison

What do you mean by Peers and why compare against them ?

Peers are companies that have similar business interests, operations, and are in the same industry sector as a stock. Comparing various metrics against peers can provide valuable insights into whether a company's stock is over or undervalued, as well as the company's growth prospects in comparison to the industry as a whole.

I have divided the Ratios into 3 Subsections namely Valuation Ratios, Technical and Forecast. Before we begin we can note in the excel sheet attached below that the market cap of HDFC Bank is highest as compared to any other Bank in the sector. I have calculated the data on an Excel sheet, but you don't have to open up a cumbersome excel sheet, pull up all the data from google and put in the formulas, what you can take away from this blog is the indicators that I will mention below and understand how these INDICATORs impact YOUR decision to BUY or NOT to BUY. I personally use tickertape , to get all these data or you can use moneycontrol which is free.

Now moving onto our first subsection:

Section#1- Valuation:

• The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS), to get this one just simply needs to divide Market value per share or Current stock price(P)/Earnings per share(E), both these figures can be found out from any finance websites. The P/E ratio helps one determine whether a stock is overvalued or undervalued. Taking a look at the Valuation Ratios for HDFC bank we can see that the PE(Price to Earnings) Ratio is 24.80, that means in order to make 1 rupee from HDFC Bank stock you will have to invest 24.80 rupees or the rupee amount an investor can expect to invest in a company in order to receive 1 rupee of that company’s earnings. A high P/E could mean that a stock's price is high relative to earnings and possibly overvalued. Conversely, a low P/E might indicate that the current stock price is low relative to earnings and undervalued. It is generally stated that if the PE is more than 30 the stock is Overvalued and if the PE is less than 30 it is Undervalued, so go Buy that stock!. But that dose not mean that HDFC bank is undervalued and investors should square off all their possessions and invest in HDFC banks only, it just means that the investors expect earning growth of roughly 25x times its earnings, for us to reach a definite conclusion we will have to take a look at the stock price rise over the years in the image below, Here take a look at the stock price growth of HDFC Bank over the years, it went from 21 rupees to 1374 rupees in the span of 22 years. So the stock has increased 8884.52% or the stock returns have increased 8884x times since its inception, as compared to a PE ratio of 25x that is a way higher number hence we can conclude that HDFC Bank is an undervalued stock. So High PE + High Growth companies may be GOOD Investment (Ex. Nestle) and Low PE and Low Growth companies may be BAD Investment (Ex. Coal India) . A negative P/E ratio like YES Bank, means the company has negative earnings or is losing money.

• The price-to-book ratio (P/B ratio) to compare a firm's market capitalization to its book value. It's calculated by dividing the company's stock price per share by its book value per share (BVPS), it compares the cost of a stock to the value of the company if it was broken up and sold today. Now, taking a look at the PB Ratio of HDFC Bank its 3.75, that means investors/market values HDFC banks shares at 3.75x times the underlying assets(BV) of the Bank. But, this ratio alone is not enough for you to determine that HDFC is a good stock to invest in, to get this you should also consider the metric Return on equity (ROE), ROE is a gauge of a corporation's profitability and how efficiently it generates those profits. Combining ROE and PB ratio can be a good metric to look at any future investment. Make sure that if a companies PB Ratio is growing then ROE should also be growing, that makes HDFC a good growth stock to invest in. But PB Ratio is mostly used for Value investing, Traditionally, any value under 1.0 is considered a good P/B for value investors, indicating a potentially undervalued stock. However, value investors may often consider stocks with a P/B value under 3.0 as their benchmark. It compares a company’s market price to its book value, essentially showing the value given by the market for each rupee of the company’s net worth. High-growth companies will often show price-to-book ratios well above 1.0, whereas companies facing severe distress will occasionally show ratios below 1.0.
• Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. It is calculated by dividing Net income/Avg. shareholders equity. ROE is considered a gauge of a corporation's profitability and how efficient it is in generating profits. ROE of private banks in India is 11.47%. The ROE of HDFC Bank is 16.44% hence it is giving more than average returns on Equity invested by the investors. As compared to its peers HDFC Bank gives more ROE, So in other words if you invest in HDFC bank you will get more returns in the future as compared to when you invest in ICICI Bank or Bank of Baroda etc.
• The dividend yield, is a financial ratio (dividend/price), expressed as a percentage that shows how much a company pays out in dividends each year relative to its stock price.

Section#2 - Technical:

• Volatility - is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index. In the case of HDFC we can see that the volatility is least as compared to its peers. So this makes it a favorable stock to invest in, as it will not be affected largely in case of an economic crisis.
• Alpha - The data item is calculated as the excess return of the stock over and above the corresponding benchmark returns. The data item is calculated using 104 weekly price close points. Benchmark is the standard against which performance of a security is measured. For example if one were to analyze the stock price performance of HDFC Bank over the previous year, just saying the stock moved up 17.3% will not give us the correct picture. It is important to compare the returns with the either Nifty 50 returns or Nifty Bank returns. Suppose we choose Nifty Bank as the benchmark, which has moved up 12% over the previous year. We can then conclude that price performance of HDFC Bank over the previous year has been better than the corresponding benchmark index. Alpha in this case is (17.3 – 12.0) = 5.3%
• Beta - Beta is a measure of a company’s stock price risk in comparison to the market. A company’s stock price faces 2 different kinds of risk. The first one called the “unsystematic risk” is specific to the company and affects only the specific company. For example labor dispute in Maruti Suzuki will affect only shares of the company and not other shares in the market. However natural calamity, political instability etc. will affect all the participants in the market and hence is called “systematic risk”. Beta is a measure of systematic risk and indicates the extent to which the stock price will move in comparison to the market. Companies whose beta is greater than 1 are classified as “high beta stocks”. The stocks of such companies are very volatile and move up or down a lot more than index prices. If the investor is foreseeing a bull run in the market, investing in such stocks might increase the possibility of better than market returns. “Low beta stocks” have beta less than 1 and are less volatile. Prices of such stocks are subdued when compared to index prices. These stocks usually act as safeguard against price drop in a bear market.
• Relative strength index (RSI) – 14D measures the speed and change of price movement over a 14 trading day period to determine whether a stock is in overbought or oversold range. RSI values range from 0 to 100. If the RSI is above 80, it is considered that a security is overbought zone or has run up too much and might fall soon. On the contrary if the RSI reading is below 20, it is considered that the security is oversold or has fallen too much and might see price reversal soon. In case of HDFC the RSI-14D is around 40 which is similar to its peer,
• 100 Days Simple Moving Average(100D SMA) - A simple moving average (SMA) is just what it sounds like, simply an average of the closing prices in a particular date range. For instance, a 10D SMA means the average of all closing prices from today to 10 days ago. It is primarily a technical indicator more relevant for traders.
• MACD Line 1 - Trend Indicator - Moving average convergence divergence (MACD) is a trend indicator that is calculated using difference between 12 and 26 day exponential price average (EPA) and tells whether a stock is in an uptrend or downtrend. An exponential moving average is a type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. MACD is extremely helpful in spotting increasing short term momentum. A positive MACD line 1 value is caused when 12 day EPA is greater than 26 day EPA. This indicates increasing upward momentum. An increasing negative MACD line 1 output indicates that the downward trend is getting stronger.
• MACD Line 2 – Signal Line Comp - Moving Average Convergence Divergence (MACD) Line 2 is calculated as the difference between moving average convergence divergence (MACD) indicator and signal line. A signal line is a 9 day exponential average of MACD line 1. A positive MACD line 2 value occurs when MACD line 1 value is greater than signal line value. There can be different interpretations of this value depending upon the absolute value of the MACD line 1. For example, if the MACD line 1 has a positive value, it means the stock is in uptrend. In this case, a positive line 2 value would mean a strong uptrend and a negative line 2 value would mean a weak uptrend. If the MACD line 1 has a negative value, it means the stock is in downtrend. In this case, a positive line 2 value would mean a weak downtrend and negative line 2 value would mean a strong downtrend. In case of HDFC Bank we see that MACD Line 1 is - 26.28 that means there is downtrend, but the MACD Line 2 is 3.80 which means there is a weak Downtrend.
• Percentage From Upper Bollinger Band - Bollinger band consists of 3 lines. The middle line is calculated as 20 day moving average of price close numbers, refer to column 2 in the below table. The upper and lower bands are set at 2 standard deviations from the middle line, refer to columns 4 and 5. The last column is calculated as the difference between upper and lower band and indicates volatility. If volatility is high, the band in the last column will widen and will narrow down when volatility is low. The upper and lower band acts as resistance and support lines. This allows the trader to anticipate the price action of the stock. Generally Bollinger bands contain 80-90% of the price action, which makes a move outside the bands significant. Prices above the upper Bollinger bands are considered relatively high. The filter value is calculated by dividing the close price by upper Bollinger band and subtracting one – indicating how far the close price is from upper Bollinger band in percentage terms. Thus, a high positive value of the filter might indicate relatively higher price. Bollinger bands should always be used in tandem with other technical indicators, as in a strong uptrend prices can remain close to or above the upper Bollinger band for a long period of time.

• Percentage From Lower Bollinger band - As explained above, Bollinger band consists of 3 lines – upper, lower and middle line. The filter value is calculated by dividing the close price by lower Bollinger band and subtracting one – indicating how far the close price is from lower Bollinger band in percentage terms. Thus, a high negative value of the filter might indicate relatively lower price. Bollinger bands should always be used in tandem with other technical indicators, as in a strong downtrend prices can remain close to or below the lower Bollinger band for a long period of time. Many traders believe the closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market. Bollinger has a set of 22 rules to follow when using the bands as a trading system. Given below is the Bollinger Band graph for HDFC bank:

Monthly :

Daily:

The Squeeze - The squeeze is the central concept of Bollinger Bands. When the bands come close together, constricting the moving average, it is called a squeeze. A squeeze signals a period of low volatility and is considered by traders to be a potential sign of future increased volatility and possible trading opportunities. Conversely, the wider apart the bands move, the more likely the chance of a decrease in volatility and the greater the possibility of exiting a trade.

Breakouts - Approximately 90% of price action occurs between the two bands. Any breakout above or below the bands is a major event.

• 5Y Historical Revenue Growth - The revenue compounded annual growth rate (CAGR) over the previous five fiscal years is used to calculate the data item. The compounded annual growth rate is the average annual growth rate of an item over a time period greater than one year. So, Higher the historical revenue growth rate, the better, as for HDFC bank it is a relatively stable bank and has been in the industry for a long time, so for a Value investor it makes sense to invest in HDFC bank and expect stable positive returns. The formula used to calculate the above numbers is:

((Sales in FY2015 / Sales in FY2010) ^ ( 1/N)) -1        

where N is the number of years of growth rate i.e. 5

Section#3 - Forecast:

• Percentage Buy Recommendations - This data item is calculated by dividing the total number of recommendations for the stock by the sum of strong buy / buy recommendations. Stock brokers regularly issue recommendations on specific stocks. These suggestions could be strong buy, buy, hold, sell, or strong sell. Typically, each broker who covers the stock will have one of these recommendations for that stock. We can see that for HDFC Bank we have around 93% analysts saying that investors should BUY the stock.
• Percentage Upside - This data item is calculated as percentage difference between target price of the stock and the close price. Stock brokers project the expected price level of the stock over the near term. Average of all these projections for a particular stock is called target price of the stock. Suppose 3 brokers are covering stock XYZ and have projected the stock price to be Rs.112, Rs.128 and Rs.97 over the near term. Target price is calculated as (112+128+97) / 3 = Rs.112.33. Percentage difference between the target price and the current stock price shows the potential upside/downside in the stock. Suppose current market price of stock XYZ is Rs.88, we have calculated target price as Rs.112.33. Percentage upside is calculated as (112.33 / 88) – 1 = 27.65%. A positive number indicates potential upside whereas negative number indicates downside.
• 1Y Forward EPS Growth - Earnings per share (EPS) is calculated as net profit divided by the common shares outstanding. EPS is a portion of the company’s profit that is allocated to each outstanding share of common stock. The data item is calculated as the percentage change between estimated EPS for the current financial year and actual EPS for the most recently reported financial year. EPS growth indicates the growth rate of the company’s profit, per unit of equity. Theoretically, a company might be able to expand its operations and increase its profits by issuing more shares and investing the same into business. However because of increase in the number of shares, EPS will not grow. A company that is able to grow its profit, per unit of equity, is considered to be efficient.

So in this blog we came across indicators like :

1. Market Capitalization
2. PE (Price to Equity) Ratio
3. PB (Price to Book) Ratio
4. ROE (Return on Equity)
5. Dividend Yield
6. Volatility
7. Alpha
8. Beta
9. RSI (Relative Strength Index) -14D
10. 5Y Historical Revenue Growth
11. MACD (Moving Average Convergence Divergence) Line 1 - Trend Indicator
12. MACD (Moving Average Convergence Divergence) Line 2 - Single Line Comp
13. Percentage From Upper Bollinger Band
14. Percentage From Lower Bollinger Band
15. Percentage Buy Recommendation
16. Percentage Upside
17. 1Y Forward EPS

So enough technical jargons, what is the verdict ? Yes all the ROEs, the MACDs etc etc. are great but should I buy HDFC Banks stocks ?

So lets say you are not that finance savvy or don't have the time to do all these cumbersome analysis to arrive at a conclusion. So to identify a fundamentally strong stock always look at the 5Y return the stock is giving in comparison to a INDEX (Ex. NIFTY 50). Down below snips of the return HDFC bank have generated:

And next is the return NIFTY 50 have generated in the 5Y horizon:

We Can clearly see that the returns from HDFC Bank are much higher than NIFTY 50 Returns, hence we can conclude that HDFC Bank is a good stable stock for Value Investment.

But, you can't expect to get 15-20% returns by doing this simple exercise, to get that kind of return you have to build a portfolio and of course take more risk and put in more work by taking into considerations all the INDICATORS I mentioned above. But really, The answer to this question is it depends on YOU!. It depend on who you are ? what are your expectations ? For Ex - If you are a value investor and want to beat inflation and are expecting to get a return of 10-12% out of your investment in HDFC bank's stock, as opposed to depositing your money in FDs (Return 5-6%) or worse in savings account (Returns 2-3%), then definitely YES.... But if you are a more risk taking individual for a passion for intra-inter day trading, then you might skip HDFC and go for some small cap stocks.

Let me know if you agree or disagree to the points in the comments below, and feel free to reach out to me in case of any queries!

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