I use a slightly modified version of P/E, which I call Future P/E.
Generally, a high P/E means that the market believes the company will have a high growth rate.
Price has 2 parts embedded in it - 1 part which values the current book value of the share and the other part which values the growth the company can have. So, I remove the book value part from the price to get a better understanding of what sort of growth has the market factored in for the stock.
@AVB What is your definition of value investing? Is it something like deep value which Ben Graham used to do and some people still do, wherein you pick up a cigar butt stock which still has a few puffs left?
Other forms of value investing include cash bargains, special situation investing, dividend growth investing (think ITC in the correct context) etc. which require an altogether different type of an investing mindset.
Yet another form of investing is buying growth at reasonable price aka GARP. (Peter Lynch kind of investing)
Going by data for Indian stocks for last 2-3 decades, and several multibagger stocks within VP like Kaveri, Ajanta, Astral, Avanti, Mayur, Balkrishna, Shilpa, etc. GARP works best in the Indian context.
It is not a one size fits all kind of an answer and depends on what works for each individual’s own investing psyche. Value works for some people who fret at the thought of paying very high PEs while GARP works for some people who are a bit more price elastic. So besides the examples I have quoted above, figuring out what works for oneself partly answers whether value investing works or not
Wanted to check what tool people are using to check their portfolio’s performance against indices like Nifty, Nifty next etc. Since we purchase at different points of time and at different prices, it is a bit difficut to track portfolio performance. I saw on some boards people were able to draw out graphs of their portfolio performance against the indices. Is there an excel available somewhere for the same.
One modification I made to the above - tracking an index like Nifty will not include the dividends… you will need to track against Nifty TRI. Instead, I track against a nifty ETF since ETFs include the dividends…
Currently, my portfolio is purely midcap and so I am checking my NAV against the NAV of M100 (MOSt Shares Midcap 100)
A really stupid question. Why are we not adding share holder’s equity while doing a DCF. Shouldn’t the value of the investment be future earnings discounted to present + current equity projected to the future. For example I have done DCF for Infosys using a discount rate of 15% and its coming out to be around 170,000 Crores(using 5 years projection+ terminal value using 4% perpetual growth).If I calculate 10 years projected cash flow discounted(Not using the terminal value), its coming around 120,000 crores. Current share holders equity is around 65,000 crores. So basically I am valuating a company with 120K Crores projected cash flow for 10 years and around 65000 in cash reserves/equity to 170,000 Crores. Isn’t too conservative. If I am really planning to buy out a business in real life using this method would anyone accept this offer?
Current equity has value only to the extent it produces future cash flow. So once you are discounting all the future cash flow, you need not separately add up current equity. Otherwise, it amounts to double counting.
Lets say I am planning to buy a restaurant and valuating 2 restaurants with similar cash flows. Restaurant 1 is having their own building and restaurant 2 is working in a leased building. Both have zero liabilities. If we value them using DCF both are having same DCF value. But in real life should the one with more equity(in this case real estate asset) demand more price ? Should we use a higher discount rate for the one with less equity in that case ?
Cash flow cannot be same in both the cases. Cash flow in the first case will be higher by the rent saved throughout the life of the asset. Terminal Value will also be higher, which you don’t seem to have considered. You can look up Prof. Aswath Damodaran’s blog or book or YouTube videos for conceptual clarity on this subject.
According to the last quarter data, promoters own 93 % in Wabco industries, which was 75% in the last quarter. Mutual fund holdings which was around 8% earlier has now become 0.1%. Could this be a step to help them in the process of delisting? What could be the implications of this? Should they not comply with the rule that promoters shall not have more than 75% holding? @dineshssairam, sir any views on this? TIA
Reserves are liabilities of a company towards it’s shareholders.
Since liabilities should match with assets on a balance sheet, there needs to be corresponding entries in Assets. However, it need not necessarily be Cash alone. Sure, a part of it can be cash, but not necessary.