I feel PE is decided by two factors:

1. Earnings growth rate
2. Perception of the durability of earnings(For how long the market thinks can earnings grow at the above rate).

So the real bet is this:

Many of us at TED are betting that Hawkins' earning is durable while the market doesn't think so yet.So one of the two of us is going to be wrong.That game b/w you,the individual and the market as a whole, is at the heart of investing.

Pearls of wisdom. This brings objectivity into a subjective topic.

Very high PE has to been seen in conjunction to growth rates which we are predicting.But what we need to understand is that we are being reasonable when we are saying that we expect Titan to grow at 30% because:

1)It has been growing at that rate in the past
2)There is a good chance that it will do so in the future too since the opportunity is there and so is the expertise(management).

Now if we can find another retailer with Titan like prospects and business model(super high ROCEs)which is trading at 20 PE,then yes Titan is riskier than this hypothetical company.But of you are comparing Titan to a 30% grower in some other industry with totally different dynamics which is available at 20 PE then it is fair neither to Titan nor our hypothetical company.

Also one loses equal money if PE falls from 40 to 20 and if it falls from 15 to 7.And very rarely will a 40 PE stock fall to a sub 10 PE.Expecting a 40 PE stock to be any riskier just because the absolute PE is higher is not correct in my opinion.Buying low PE stocks is no safer than buying a high PE stock,when business model is analyzed properly.But lets just agree to disagree cos finally its about one's comfort level

PS:Titan is just an example to illustrate the point.

Edited by prabhakarkudva - 05/Jun/2010 at 12:42pm

In crores	2009 - 10	2008 - 09	2007 - 08	2006 - 07	2005 - 06
Total Income	274.02	195.82	57.9	43.81	31.55
Expenditure	-203.03	-157.6	-50.03	-38.65	-26.03
Net Profit	45.27	23.81	4.54	4.27	2.48
Growth in	2009 - 10	2008 - 09	2007 - 08	2006 - 07
Income	40%	238%	32%	39%
Expenditure	29%	215%	29%	48%
Net Profit	90%	424%	6%	72%

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