Why are the multiples p / e different for many actions?
There may be 2 shares of cement works available. Company A could have an ap / e multiple of 20 times the forward earnings in one year and other Company B could have an ap / e multiple of 10 times. In terms of multiple p / e, company B is cheaper, does that make it better. Not always. Markets take into account future growth, promoter ownership, promoter experience, debt profile, and a whole host of other things.
However, in most cases, all things being normal, it is best to avoid companies that are horribly expensive in terms of p / e, unless they are growing at a breakneck pace. One way to look at them is the average w / w over the past 10 years and w / e now. If it’s a high premium, it’s best to avoid company stocks.
Attractive stocks that trade at a high premium to long-term averages
|average p / e over 10 years||Current p / e||premium|
(Courtesy: Motilal Oswal, Bulls and Bears Report)
Lots of IT sector stocks
IT stocks were in the spotlight as the pace of growth and expectations turned robust. We think valuations are strained. However, for the markets right now, there’s a lot of cash flowing into mutual funds and ending up in stocks, making them even more expensive. Globally, stocks are on fire and it looks like unless interest rates rise we could see stock valuations continue.
As far as Reliance Industries is concerned, valuations deserve a premium due to the robust growth that is likely for the expected growth. However, for Titan, we think the valuations are overstated. There is another company that is not on the above Divis Labs list where the premium is high by 51% and we think the company’s valuations are overstated.
Markets remain slaves to liquidity
It is often said that markets are slaves to liquidity and whatever liquidity will drive stocks and valuations to a toss. It’s the same now. Liquidity is pushing stocks to sky-high heights and the trend is unlikely to change. For investors, now is the time to be cautious, even though the markets may remain irrational for a long time.
We suggest individuals look to other companies where dividends are regular and prices are near 52 week lows. We ran a stock analysis at the 52-week low, which investors might read.
Investing in stocks presents a risk of financial loss. Investors should therefore exercise caution. Greynium Information Technologies, and the author, are not responsible for any losses caused as a result of decisions based on the article.