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deepinsight
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   Posted: 21/Mar/2007 at 7:11pm |
Basantji and Omji: thanks for your thoughts.
One more related question.
What is a good forward p/e which you are willing to buy at which you would consider value? Is there a hard cutoff to when its unreasonable?
1. This is a somewhat difficult issue as most of the companies which we get attracted to own are growth oriented and tend to trade at high trailing multiples.
2. As future is generally unknown, hazarding a guesstimate needs to be peppered down for bringing in some conservativism and allowing for some operational underperformance.
I have tended to use peg ratios etc. (and have sometimes been punished when growth does not come in as anticipated)
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basant
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Posted: 21/Mar/2007 at 8:46pm |
Excellent point: The PEG ratio goes wrong sometimes. That is when we take the "g" as more then 40%. In otherwords the theory should be revisited or rewritten as:
Buy a stock with a PEG of less then 1 (subject to "g" less then or equal to 40)
That means a forward PE of 40 is more dangerous then anything but here also there is another exception. Companies with small market caps say less then Rs 500 crores can have a PE of more then 40 and still be profitable or companies that are yet to start contributing to the bottomline ina big way eq. GBN - most analysts have written it off but Fy 09 (forward) could be a bumper year for it so evaluating a company like GBN on PE basis could be incorrect or NDTV for that matter because the revenue from subscription is yet to come.
There is yet another factor to be taken care of "visibility" so with a HDFC Bank visibility is high not so much with a software company where one missed order could spell doom for the company. This is what happened with mastek in 2003 and it lost 50% in one day.
So with companies having good visibility a higher PE could be given but a PEG of less then one is the general norm with several exceptions some of them which I indicated from experience above.
The PE drivers can be seen from this link. The RoE in this link actually indicates the growth because companies cannot grow at more then their RoE
Edited by basant - 21/Mar/2007 at 8:47pm
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deepinsight
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Posted: 21/Mar/2007 at 9:20pm |
Originally stated by Basantji:
Buy a stock with a PEG of less then 1 (subject to "g" less then or equal to 40)
___________________
So a forward PEG of less than 1 but the g and therfore the forward p/e of less than 40.
I have normally been buying "growth at a reasonable price" and still find it extremlly difficult to pay anything more than 15 times forward. Is this a personal genetic flaw which needs to be corrected for high conviction stories with good visibility? (normally this is only visible to me as small companies do not have such great visionary analyst ;) )
Have you successfuly entered or bought at more than 15 times forward earnings and made good returns?
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kulman
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Posted: 21/Mar/2007 at 10:20pm |
....as small companies do not have such great visionary analyst ....
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That would be the best time to buy such good stocks. If I recall correctly Basant jee bought TV18 when it wasn't on many Analysts' radar.
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vivekkumar_in
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Posted: 21/Mar/2007 at 10:36pm |
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Good chain of question from Deep & thoughtful answers Basantji !
Deepji keep up the good work ! I am learning from your line of questions...
Edited by vivekkumar_in - 21/Mar/2007 at 10:36pm
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Often we forget there's a company behind every stock,and there's only one reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.
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basant
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Posted: 21/Mar/2007 at 10:42pm |
Originally posted by deepinsight
Originally stated by Basantji:
Buy a stock with a PEG of less then 1 (subject to "g" less then or equal to 40)
___________________
So a forward PEG of less than 1 but the g and therfore the forward p/e of less than 40.
I have normally been buying "growth at a reasonable price" and still find it extremlly difficult to pay anything more than 15 times forward. Is this a personal genetic flaw which needs to be corrected for high conviction stories with good visibility? (normally this is only visible to me as small companies do not have such great visionary analyst ;) )
Have you successfuly entered or bought at more than 15 times forward earnings and made good returns?
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Very difficult to make a 10 bagger with 15 times forward. Pantaloon when I bought it was 8 times current year and Tv18 was 12 times current year but we have to look at these PE ratios in conjunction to the market. At that time the market PE was 10 times so 10 times was not as cheap as it appears now.
Similarily with the market at 15 times forward 15 times now is as good as 10 times in Fy 03-04.
The biggest money is made in a PE expansion and at 40 times forward the scope for such a PE expansion is limited and that is the problem - we can rely only on EPS growth from there on for capital appreciation but if we buy something at 8 times and the company's PE expands to 40 times a 5 bagger is made without any effort whatsoever - without a PE expansion it is almost impossible to get a 10 bagger in quick times (2 years) hence the desire for a lower PE company even if companies grow at 70% that PE cannot hit 70 on a consistent basis. That is because everyone knows that in the longer run the growth would taper off and the PE would come down to more reasonable levels (30-35 times) hence the possibility of losing half the capital on a PE contraction is very high.
This is where we have discussed PE expansion and contraction in some detail.
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omshivaya
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Posted: 21/Mar/2007 at 1:40am |
Excellent...just excellent points Basant jee. On that note, Pantaloon trades approximately at 22 PE forward, considering EPS for FY08 to be 20. Is that cheap sir? And is there a re-rating possible at all in case of Pantaloon from hereon, even though it has moved up so much past years.
If yes, what would be the PE forward(normal), that it could get re-rated to. I am talking of forward, not Trailing sir. Pantaloon I think should grow at 50% minimum, so kindly answer the pe-rating keeping the 50% growth as the benchmark.
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basant
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Posted: 21/Mar/2007 at 10:26am |
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None of the brokerages are talking about income from new businesses at pantaloon and hence they have pegged the eps at Rs 13 for FY 08. but pantalooon should trade at least at 30 times forward. in a few months we could have fy 09 as forward.
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