Nifty PE crosses 24|A statistically informed entry-exit model!

Investing Strategies
1527

Great point. I am glad you mentioned, giving me a chance to elaborate on my views.

Simply buying Low PE stocks is not a good strategy. The PE is low for a reason: Either the stock has poor growth, or has a shady management.

Our ultimate objective is to get into those stocks that show steady appreciation in EPS. Because increase in Share price is sustainable only if backed by increase in EPS.

The companies that I have marked as non-performers are the ones whos EPS has increased by less than 10% in last decade or have had corporate governance issues or are cyclical. Their managements aren’t growth oriented.

On the other hand, performers in Nifty-50 are leaders in their respective industries, yet are focused on growth. They don’t give fat dividends, but only in moderation. The precious Free Cash is used for growth. Due to which they have a strong future prospects. I believe these companies will be leading the nation towards Nifty 20K mark in the next 5 years or so.

Coming back to your question:

ONGC has a PE of 6 and Asian PE 60.

Asian is very highly likely to continue to post EPS growth of 15% for the next decade. Cannot say the same thing about ONGC. It has been nowhere close to EPS growth of 10% in the last decade, 6.68% actually. This is common knowledge, which is why Asian is dearer to the world, hence commands a PE of 60.

Inspite of this knowledge, I for one, do not want to dive into making an investment when Nifty is as overbought as PE 28. I believe Nifty PE 18 is average. On its way down from 28 to 18, I am unsure how much the performers will correct. In normal, once in two year, corrections Asian corrects 20%, in sharp bear markets I am unsure how deep it will go.

In summary, I will wait for Nifty PE to reduce to normal levels to make any significant investment, that too only in growth stocks of Nifty-50.

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1528

You do agree that certain business deserve a higher PE and may be a buy even above a PE of 30, right? In that case you cannot conclude Nifty as overbought if its PE has reached 28, as the above average PE can be justified by change in constituents of Nifty over the last decade. Nor can you expect the mean reversion to the historical average.

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1529

You seem to be too sure that 18PE will come. What if it corrects from 28PE to 21 PE only and no lower - a good 25% correction in absence of any 2008 like event?

1530

PE of a stock means how high the market is willing to pay for future growth. The mature market takes into consideration the near future more than the distant future. Therefore, for a nation as a whole it is highly unlikely that the fundamentals change so much that an erstwhile mean of PE of 16, increases to a new mean PE of 28, which is 75% higher.

If it were a single small to mid cap company, then such an upgrade if PE rating is a possibility, but for a nation as a whole I find it highly improbable.

But, what I do find probable is this.

From the data points, I see that Nifty has spend 50% of the time below PE of 18. This is not a matter of opinion, it is a plain fact.

But, it is the past. And the future could be different. So, I believe Nifty is bound to come back to PE 18, and spend at least 25% time there, if not more.

I do not wish to be anymore bullish than this, knowing the EPS growth of Nifty 50 companies in the recent past, and having an overall feel for the Indian economy.

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1531

Reversion to the mean, is not wishful thinking. It is only natural. I would find an investment strategy faulty if it revolved around buying only at lower extremes and selling at higher extremes.

1532

Nifty is not a true representative of indian economy. It only represents some 50 companies chosen arbitrarily. Yes, it contains some of the country’s largest businesses, but that’s about it. And over time, as our country liberalised and reformed, the nature of these top 50 chosen business have changed. The weightage of asset heavy public sector companies has declined as they are being replaced by asset light private sector companies like HDFC Bank. The mean PE of the past has no significance if the nature of the underlying has changed.

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1533

I wouldn’t know what truly is the face of the Indian Economy. The GST collections, the health of businesses, the economic growth in the villages or metro… I don’t know.

But, what I do know for sure is that, 50% of all investments in the stock market is in Top-100 Nifty companies. Being in the Index gives these companies the “visibility”. This, along with their Brand names, attracts liquidity from world over.

This is what I am counting on. If India is going to indeed be a progressive economy, then not without commensurate growth in Nifty-50.

I see Nifty touching 20000, in time for the next elections, but am afraid of what will happen in between.

1534

Happy to see your bullish stance with 5 year time horizon.
Current Nifty PE is 28 with EPS around 407. For Nifty to be 20K with above average PE of 18, EPS has to be around 1111 giving us annualized rate of 22%.
We are hearing every year (from last 3-4 years) from all analyst that next year its going to be 15-20% of profit growth only to get disappointed. What things you see have changed to give such target and such high growth in EPS? Or do you think PE will stay same 28~32 and we see a normal EPS growth of 10%?

1535

Start: 11500
End: 20000
Period: 5 yrs

Is 11.70% CAGR, which is achievable.
At the time of 20000, PE could well be 25+, since it will be a bull market top.

1536

So you are willing to take an upside risk of 8000 points because you won’t take a downside risk of 4000 points?

1537

That is a clever way to show me the mirror. I appreciate you doing it.

The reason for me to act this way is because, I am unsure whether I will have the courage to hold onto my investments, should there be a sharp correction.

More so, because I believe that the probability of a correction is very high post elections. The Nifty Option Chain too is showing it now. In fact, the next 2 to 3 years will be all about correction and consolidation.

That said, I will not wait for PE 12 or 15, like it has happened so often in the past. PE 18 is my trigger for action.

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1538

A point to note:

Due to the recent disruption in the pharma sector, pharma company’s are almost out of the Index. But, this is likely to change in the next bull run. SInce, pharma is not in my circle of competence I am unsure as to which pharma cos will do well in the years to come. Therefore, I may just hv to buy Reliance Pharma MF. It has the highest AuM in the category and returns too are competitive.

1540

Here Rajeev Thakkar talks about payingHigh PE & risk associated, also how one need not be in cash fully during High Nifty PE valuations by avoiding euphoric sectors/stocks.

1541

Interesting article title

1542

NSE wants to align indices with real economy so that things like corporate earning growth and GDP are more in tandem, also they says as HDFC, ICICI and other banks being promoter less institutions have huge weights vs TCS which is second largest firm does not come even in top 5 weightage.

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1543

Just felt like writing a few lines. Hope they are of some use and value to read.

Year 2016. Month November. Event: Demonetization.

I clearly remember that everyone was rattled by the news of demonetization and the financial markets started taking a beating. Everyone was pessimistic and all news was pessimistic. No one was certain of what tomorrow will bring. The news channels were constantly showing the plight of people queuing up outside banks, hospitals etc.

Many of the people I spoke to were scared. They were taking about there being GPS trackers in the new currency (:slight_smile:) and that the government was going after bank lockers next, and that government would come after benami real estate next. That there was a agenda being implemented… etc etc…

There basically was uncertainty of tomorrow. It was so uncertain that people were dumping stocks like there is no tomorrow. No one was sure what tomorrow brings.

Today, I feel the same thing is playing out. As they say, “history rhymes but does not repeat”. The rhyme is the same. Today people want clarity on what is coming next. I feel they are waiting to get the clarity and then they believe they will invest.

Mr Warren Buffett has said "“The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”

In the stock market we know, prices may move up or down 5-10 percent from where we buy and most are not bothered with such small swings. But then they get confused with too much news and data and become frozen. Cannot act.

In hindsight this will also in all probability turn out the same. Sure, it may swing a little bit, but today uncertainty is at a peak. When thinking about the buying today I feel a little pain near the heart. I am personally overcoming it to invest.

This is the falling knife of the stock market, and all the whiplashing it is doing is making people more and more confused.

We should get some clarity in our minds. We will probably not even think about this event in 2 years. We would have compounded our capital by buying this uncertainty at around 10 to 15 percent per annum. Something else will come to scare us in due course and that will become the biggest issue for us then and today’s questions will seem small and laughable.

Prices of so many stocks are very low today. They are low because the consensus is not cheery. We should use it to our advantage.

If not sure of the stocks there are some really good mutual funds. Use the opportunity.

Best.

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1544

It was almost obvious that normalisation of prices will play out but only after voting has happened in important zones. I have mentioned this several times.

What bothers me about the quoted paragraphs is the fact that the investor is hoping that the situation will improve and 10 to 15% will be made. This is a mindset which could easily rattle out an investor.

Mr.Market is constantly looking into eyes of each investor, to find two parameters

  1. How much drawdown can he bear.
  2. For how long can he hold.

Mr.Market की सोच वाहा से शुरु होती है, जहा से इन्वेस्टर की ख़तम होती है।

The prices, in all its Glory of randomness, will swing. At some point it will surely exceed ones tenacity, and the investor will suspend all logic, will get sentimental and act out of his basic instincts, fear and greed (and one other). This is the modus operandi.

In our case, the expectation is of 10% gain in two years. Mr.Market now has both the parameters he wants from you. Your problems with the market could begin sooner than you know.

However, what Mr.Market cannot control is the underlying business. But, it’s easier said than done.

Having purchased at these levels it is going to take a lot of skill to emerge profitably. I know my two parameters are 30% and two years. Mr.Market can easily shake me out from these levels.

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1546

Every 3-5 years Mr. Market presents an opportunity. This has been happening for the last 20 for which data is available to me. During this time, be it 2004, 2008, 2011, 2013 or 2016, stocks correct to levels well below their long term averages. If one looks at P/B data of indices such as sensex and small cap, all this correction has literally just wiped off the excess from the market and we now stand at or just below long term averages. 10-15 years down the line, do I believe an average portfolio can return 14-15% from here? I certainly think so. Over the next 5 years, do I feel this is the lowest P/B at which I can buy the market. While the future might be different, history certainly says no. As near as Feb 2016, Sensex P/B was as low as 2.45 compared to 2.85 today and BSE small cap PE was as low as 1.61 as compared to 1.95 today. I am not going to be greedy or anchor myself completely to these numbers but I will certainly not invest anywhere close to 100% of my “equity corpus” but rather wait for Mr. market to present me this opportunity. This is knowing full well that the Mr. market is in no ones control and might rally by 100% before numbers, which are close to the ones I mentioned, are reached.

My last 2 chunky investments were in October 18 (sensex PB - 2.6) and Feb 19 (sensex PB - 3). I will allocate some more but not all now. Until then, for the non invested part of my equity corpus, I am happy making a 11% yield on quality AA bonds or 8% in liquid funds.

Sure, if 1 goes stock specific there are lots of opportunities at these levels, but the rising tide lifts all boats. When evaluating a specific stock, the difference between price x and price x-20% might be terminal value being lesser by 1% or growth rates being off by 3% in DCF. As Mr. Changu terms it, I am not an “excel ninja” and cant predict that accurately. All I can do is judge the height of the tide in relation to history. This can go really wrong in the face of a 0 interest rate world or if the future does not “rhyme” with history as it has done before but I will take my chances.

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1547

I think that we are in late stage of bottoming out and after election results or couple of months we won’t be seeing these prices. I was bearish from last 1.5 years but I think that it’s time to change that view. There is lot of capital waiting on the sidelines and whenever the tide turns , I am sure that market will keep that capital waiting. I feel these are good levels to enter , especially in small and mid caps.

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1548

Actually deployment of capital already started, interesting is the source of money coming to mid/small cap:

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