The golden rule of investment is to pour money in stocks that are trading at attractive levels compared to their intrinsic value, thus allowing investors to create wealth over a period of time
Benchmark indices, even after the recent correction, are trading at a slight premium to historical averages but there are many individual stocks that are available at an attractive valuation when compared to historical averages.
Top 12 Nifty stocks that are trading at a discount to 5-Yr PE average include Sun Pharma, ZEE Entertainment, Indiabulls Housing, Coal India, ONGC, Dr Reddy’s, Tata Motors, IndusInd Bank, Tata Steel, Eicher Motors, M&M and GAIL, according to a report from Motilal Oswal.
A Price-to-Earnings ratio or PE value the company is a ratio of current market price to its earnings per share. It also referred to as multiple. This measure of valuing the company is used by investors to filter out stocks for investment.
The golden rule of investment is to pour money in stocks that are trading at attractive levels compared to their intrinsic value, thus allowing investors to create wealth over a period of time.
Experts advise investors to use the stocks as a filter to shortlist names, but they should combine it with their own study by understanding the fundamentals of the company and the impact of external environment on the demand scenario.
“The 5-year historical average P/E can be one of the key criteria to look at before investing in any stock. However, the key is to avoid buying the falling knife and do more research to understand industry dynamics and fundamentals of the companies,” Ajit Mishra, Vice President, Research, Religare Broking Ltd told Moneycontrol.
“For instance, apart from facing a slowdown in their respective industries, companies like Sun Pharma, Indiabulls Housing are also witnessing pressure due to on-going corporate governance issues and hence fresh investments at this juncture may not be a good decision,” he said.
Table: 12 stocks that are trading cheap. Please note the given list is for reference and not specifically buy or sell ideas.
Mishra said despite a good quarter, Ze Ent is likely to remain under pressure as the recent deal for stake sale did not satisfy the investors. On the contrary, auto stocks like M&M, Eicher, etc. are facing the brunt of the slowdown in the automobile industry.
He likes ONGC and GAIL that look good from a long-term perspective, however, these stocks may remain under pressure in the near term due to subdued performance in Q1FY20.
“IndusInd Bank may remain under watch for few months post its acquisition of Bharat Financial Inclusion and hence fresh investments should be done on dips and not at current levels,” added Mishra.
Stocks trading above 5-year Avg PE
Most of the above-mentioned stocks have shown steady growth record and quality management makes them attractive bet even at high valuations, suggest experts. Booking profits is not advisable.
“Nifty is already down 1,000 points from its peak. Booking profits in such stocks is not advisable. It is late now, better to wait for Nifty to rally to 11,500, which is 50 percent retracement from of the entire fall,” Umesh Mehta, Head of Research, SAMCO Securities told Moneycontrol.
Experts further say that valuation expansion will happen when growth in business has hastened, margins have expanded, revenue and margin visibility has improved for the company.
“These businesses have prudent management, strong promoter track record and sound long-term growth prospects that can fetch healthy returns over the long term. These stocks are likely to trade at a premium valuation given a consistent performance as well as market leadership in their respective industries,” said Mishra of Religare Broking Ltd.
He further added that these blue-chip names should form a part of the investor’s portfolio. “We believe investors should not book profits in these stocks as the investments could grow substantially over a long-term,” he said.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.