If you are a long-term value investor, the first thing you look at is the PE ratio. You even have screeners for that. Sometimes you don’t invest in great businesses because you don’t find it cheap. How can you buy a stock that is trading at obscene PE multiples, that’s crazy!!! As a good value investor, you don’t take the trade only to find those same stocks rallying 2x-5x over the next 1-3 years. The first step towards becoming a successful investor…Unlearn this low PE is a good idea because following that you will only buy bad businesses.
I am not saying anything new here. This is a 2015 tweet.
PE ratio is the most useless indicator when it comes to investing.
— Deepak Singh (@smarket) July 22, 2015
Let me share one case study: Dixon Technologies
Dixon Technologies was trading at a PE of 50 in June 2020 when I recommended it . It looked crazy because the stock had already rallied 56% since March low and the overall macro environment was super gloomly plus the stock was trading at obscene multiples. Here’s the snapshot of what I shared back then
Here’s what happened to that trade. The stock is up 3x since then and that too in less than 7 months
Source: Chartalert.com
How did that happen?
Stock Prices rise the most because there is a desirability to own the business and it comes when investors perceive that there is going to be a dramatic improvement in the business prospect of this business. As per new estimates, EPS of the company is expected to be 282 in FY2022 which means on next year’s earnings, the stock is still trading at 50+ times. The Atmannirbhar policy of the current Govt is supercharging business environment and earnings prospect of the company. Now this looks obvious today and everybody is falling over each other to buy the stock (even value investors) but most of them used to mock buying such high PE stock when it broke out to a new all-time high
There is a very simple lesson here. Never bet against the collective wisdom of the market and pay attention to the stock prices. Don’t ignore good growth businesses just because they trade at a high multiple. Good things don’t come cheap.
What is market trying to price in….is far more important than Trailing PE. So much useless talk about PE. Market prices the surprise
— Deepak Singh (@smarket) March 13, 2017
When people say What about fundamentals, then ask Whose fundamentals.
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Fundamentals don’t drive stock prices.
How people perceive those fundamentals drive stock prices.
As a market participant/trader, keep an eye on how the market views the fundamentals than being obsessed with your own version of fundamentals. It means look at the price action and it tells you without bias what the market thinks about the stock. Once you read the price action, go and find the reason why the market has such a view on the stock, and be aligned with it.
This is the level one mind training every individual requires to be in sync with market thinking. This is the real fundamental of Investing. I call it Science of Stock Price Action
If price action fascinates you – then Science of Stock Price Action is a great place to start.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purposes. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers