First try to understand the business rather than valuation, what they are making, to whom they are serving, is it a commodity business or a brand or any thing u can relate to it in your day to day life or in your knowledge( aka one upon wall street - peter lynch way). Slowly u will understand businesses their business models.
Practical Examples:
- I as a person dont like to doing government job after i passed with Engg. degree and never applied for any, for what ever be the reasons. Then when i started investing i was referring to some PSU companies and checking about their businesses and brought some, then one fine day i realized that how can i put my hard earned money in a business when i dont even want to work. So I avoid all businesses where Govt. is owner or Govt regulation is there why becos public changes the Govt every 5 years/ Minister changes every 2 to 4 years/ Management/CEO/MD every couple of years before retirement.
Look at where is SBI and HDFC bank when they started and where they are now - How many COEs SBI changed during the period of Aditya Puri tenure and how many govt also changed. - I dont like to take bedt/loan and wants to live without that burden/stress so obviously avoid all companies who earning this way like banks, finance companies and pay more interest having very high debt companies.
- I dont drink and smoke so avoid all these type of companies y becos i do not show /have interest to know more about these businesses.
- I like to pay more for brands for their Quality and able management so started buying brand companies for example Bullet, i used to admire this bike as a kid and then came to know about Eicher and its doing very well and brought slowly 2 years back even though its expensive.
Try to find companies what u as a person like,u r interested/hobby/competitive knowledge/understanding, or very simple business to understand and filter companies which u can avoid and check business opportunity how big is the pie, then run by able management and then the valuations.
One filter to start with:Check & understand what is ROE & ROCE, (why some companies having high, Minimum 15 to 20% and why some less may be it is a commodity business) of companies with no debt or less or manageable debt (Debt/Equity ratio around 0.5) and slowing understand the business model / products / management walking the talk, skin in the game / how much money they are paying as dividend/ paying taxes/ how much re-investing in business.
Another filter is Try to find out companies hitting 52 weeks high and life time high and find out if all the companies in that sector also doing the same, (recently Chemical companies and Graphite Elctrode companies, couple of years back Textile companies,) this will help to identify sectors which are growing and in them find sector leaders with able management - The Thoughtful Investor.
The one sentence that changed my thinking about buying/paying more for high value companies is “40 PE companies with 40% growth”, Now market is willing and ready to pay 80 PE also for these…Dmart, Page…as along as growth is there…
Hope this helps…