As many as 20-30 bluechip names are trading almost 50 percent discount to their 5 year average of price to earnings multiple and can be considered attractive for investment purpose.
The euphoria on the D-Street witnessed in the whole of the year 2017 witnessed a slowdown in the first two months of the year 2018 which led to a huge correction in both large as well as mid & smallcap names.
As many as 20-30 bluechip names are trading almost 50 percent discount to their 5 year average of price to earnings multiple and can be considered attractive for investment purpose. Stocks which are trading below their 5-year average include names like BEML, Eicher Motors, Bosch, SBI, Hero MotoCorp, HPCL, TCS, IOC, REC, Infosys, Bajaj Auto and Maruti Suzuki India Ltd.
Let us first understand what is PE ratio? The price to earnings ratio which is also known as PE multiple is calculated by dividing the market value of share by Earnings per Share (Market Price/EPS).
It indicates the amount an investor is willing to pay for each rupee worth of earnings of the company. Price-earnings (P/E) ratio is one of the most widely used value indicators and quite prominently used by investors while investing.
Low PE multiple compared to average is a good sign because it also suggests that earnings have also started to bounce back and the stock is not entirely momentum driven.
“Stocks with low PE ratio are perceived as having a cheaper current price, hence expected to generate a higher return in the subsequent period. There are plenty of stocks which are available at a deep discount price which is part of value investing with low PE and combining it with other factors such as Management, Industry and Profitability i.e margins,” Ritesh Ashar – Chief Strategy Officer at KIFS Trade Capital told Moneycontrol.
“Among the stocks, DHFL is trading at a discount of 79% with respect to 5 years Avg PE looks to be a very good bet for the long term and value investors who are looking for a balanced portfolio with low risk,” he said.
Most of the top tier bluechip names are trading well below their 5-year average PE. But, investors should focus on stocks in those sectors which are likely to outperform.
“A sector which has done well in last two-three years and its heavyweight available at discount will be an opportunity for investors. Stocks like SBI, TCS, Eicher, and NCC does offer opportunities for investors to buy them at lower levels,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.
PE multiple signify the past performance if the company; however, for taking investment decisions investors should also look at the future earnings potential of the company. This can be done by calculating forward PE.
For calculating forward PE, analysts’ use earnings estimates to determine what the relative value of the company will be at a future level of earnings. If the forward P/E ratio is lower than the current P/E ratio, it means analysts are expecting earnings to increase.
On the other hand, if the forward P/E is higher than the current P/E ratio, analysts expect a decrease in earnings.
“Stock quoting below the 5-year average may look attractive on price but it’s the future outlook on earning that matters the most. It is advisable to see future growth visibility rather than solely looking at past P/E,” Hemang Jani, Head - Advisory, Sharekhan told Moneycontrol.
“It is the future outlook on earnings that matters and not the current discount to past earnings. Ideally one should look at both - current performance along with likely growth in the next 12-24 months for investment decisions,” he said.
Other parameters to track other than PE:
PE Multiple can be used for deploying money but at times it is also used for position sizing in a bullish market by institutions or MFs.
There are many other parameters which investors should keep in mind before deploying cash or accumulating stocks, because PE multiple itself has some limitations, suggest experts.
“Since PE Multiple has limitations it alone may not be satisfying the criteria. To add more value to it investors should use Earnings per share, Sector PE and relative valuations can be applied. For a conservative investor Earnings yield can help to see stocks that can do well along with benefits of dividends,” said Nadeem.
Jani of Sharekhan is of the view that along with commonly used parameters like PE EV/ EBIDTA, PEG ratio, Price/Book, ROE etc. One may look at P/B For financial stocks, embedded value for insurance companies.“For companies have multiple businesses SOTP (Sum of the parts) methodology is used. Holding company are valued at a certain discount (20-50%, discount rate may vary),” he said.