Income,growth,value stock: Which one to grab?

Now first time investors in the market are usually hesitant and immensely confused ! And burdening them with these concepts may certainly put them in the most uneasy situation.True! But the market is certainly not a playground for those that are unprepared. Sounds harsh? Right! But imagine going for your exams without any form of preparation. Can you pass? By chance, luck,or coincidence .. yes!
Once, twice, thrice even but not always. To survive in the markets, feel the turmoil, see your investment going down by over 50% during the bear market, you need to have stomach not brains, as Peter Lynch had suggested.Hence if you fight , fight it knowing all the rules of the game. It certainly is no place for the chicken- hearted.

Forget my UNUSUAL BARRAGE OF WORDS! Let us concentrate on the topic. The industry and market veterans usually group all the listed stocks under these three categories:

1. Income stock 2. Growth stock 3. Value stock.

Peter Lynch used six different categories :

1.Slow Growers 2.Stalwarts 3. Fast Growers 4. Cyclicals 5. Turnarounds 6. Asset Plays

However Peter Lynch's categorization shall be discussed in some other posts.

Now let us focus on the first category called the Income stock.

What is an Income stock? 

To put it plainly, Income stock is that type of company which usually pays a high dividend yield,ranging from 3.5 to even 12.5-13% !! And this does not necessarily mean that this form of company is an excellent company. It may simply mean that when there is less scope for expansion of the company or increasing its market share , the company prefers to distribute the distributable surplus among the shareholders. However there is also a pitfall. Usually the dividend retention ratio or plough-back ratio adds to the book value of the share. But if more than 90% of the eps is distributed among the  shareholders then the book value remains stagnant and the price of the said company remains range bound, usually over a long period of time. Here is an example of few income stocks listed in the Indian bourses. It is not surprising though that most of them are Public sector companies, owned by the Government of India, and especially when the government is continuously struggling to bring down the CAD( Current Account Deficit) in India!

Income stocks in India:

Income stock	Price of share	Dividend Yield
Coal India	305.8	8.96%
NMDC	90.2	12.19%
PFC	164.35	8.09%
REC	160.95	7.45%
Hind Zinc	169.9	16.36%

And by taking a single look at these above stocks you can pretty well understand that these yields are much higher than any fixed deposits in banks or any bonds ! Some investors buy them because they serve as a perennial source of passive income!

What is a growth stock?

Now this is another not so easy a question to answer! The problem is related to the perception of this form of stock. To put it as simply I can , it may be said that a growth stock is one which usually has a growth prediction ,which is much higher than other companies, both in terms of revenues and earnings, in the prospectus future .And since this form of stock is extremely focused on its expansion, it retains most of the income to put into expansion. Hence there is less dividend yield . But the prospect of high growth leads the investors to invest in these stocks even though they may be very highly priced in terms of p/e(price/earnings ratio), p/b(price/book) , p/c(price/cash). They tend to do extremely well during the bull markets and usually nosedives during the bear. 

Here is a list of companies which is considered growth stocks in India:

Growth stock	p/e	p/b	p/c
Asian Paints	56.95	17.54	48.81
Eicher motors	47.56	13.57	33.56
Gillette India	62.73	20.19	53.95
Nestle India	124.05	22.10	73.34
Bluedart Express	73.61	28.7	60.87

What is a Value stock?

Value stock is usually the one which has a low p/b<= 1-1.5 , p/e<15 , eps around 18-20,  low or no debt/equity ratio that is one which is usually a cash rich company. It should be noted that the price/cash ratio of this company also hovers around  8 to 9.

But the question that comes with this is why is the price of the company so low ? Are the investors fools or blind?  The answer to this question is neither. You find these companies under valued usually trading below their intrinsic value but there are some reasons behind the low price. It is quite possible that the company has failed to deliver on its projected growth  or there are some serous management issues or the company could not meet the expectations of the investors top line or bottom line or even on EBITDA.

Interestingly the investors investing in this form of stock expect the stock to become a growth stock in foreseeable future. 

Here is  a list of companies which is considered value stocks in India:

Value stock	p/e	p/b	p/c
Hind Zinc	8.78	1.39	8.08
DHFL	7.86	1.24	7.61
NMDC	11.8	1.01	11.05
NTPC	11.84	1.39	7.74

Income,growth,value stock: Which one to grab?

ALL OF THEM!

Remember the stocks in themselves are not categorized. It is us that do the categorization.  It is very possible that the growth stock may act like an income stock or a value stock behave like a growth in future. 

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