Staying with quality always benefits investors and this is evident from the fact that low P/E stocks (value) in the BSE500 outperformed high P/E stocks by 20 percent from February 2016 to February 2017, Credit Suisse said in a report.
Low PE stocks underperformed high PE stocks by 8 percent till Jun- 17, but, since then, they have begun to do well again.
The global investment bank remains overweight on Energy, IT and Metals which have driven positive returns, whereas some staples (ITC) and Pharma stocks have continued to underperform.
Indian market rose by about 24 percent at some point in 2017 to hit fresh record high but then geopolitical concerns, profit booking as well as high valuations pulled benchmark indices lower.
PE ratio or price to earnings multiple is calculated by dividing the market price of the share with its EPS or earnings per share. The company with a low PE ratio looks attractive
High or a low PE is calculated by taking the median of P/E ratios over several years, analysts can arrive at a standardised P/E ratio. This could serve as a benchmark to indicate whether or not a stock is worth buying. A low P/E can indicate the market may be undervalued currently.
Top stocks which fall under the low positive P/E segment as per the global investment bank include names like RIL, ONGC, IOC, SBI, ICICI Bank, HPCL, BPCL, and TCS.
Top stocks which fall under the high positive P/E segment include companies like HDFC Bank, Maruti Suzuki, ITC, Kotak Mahindra Bank, L&T, Bajaj Finance, and Bharti Airtel.
“Low P/E stocks have forward P/E lower than the median of BSE500 stocks where forward earnings are available. While low P/E generally provides a downside cushion, earnings progression for the current set has also been better,” said the report.
The report further added that over the past 12 months, one-year forward earnings are up 9 percent for the low P/E set compared to 2 percent for high P/E stocks. Since Jan-16, the one-year forward EPS has risen 6 percent compared to 4 percent for the high P/E set.
Credit Suisse continues to believe that domestic growth is likely to stay muted for the next several quarters. While FY18 GDP growth estimates have been reduced sharply after the 1Q release, FY19 estimates have been left largely unchanged, it said.
Disclosure: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
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