PE ratio: How it helps buy great stocks

     

Have you ever experienced the following scenario: you buy 1 kg of apples at Rs 100 per kg, only to find out they were available at Rs 80 per kg just a few feet away? Aren’t you disappointed at having to pay more for the same quality of apples?

The same also applies to stocks.

If you buy a share of company ‘A’ for Rs 100 and later on find out that the share of company ‘B’, with better earning prospects, is available for Rs 60, it is bound to disappoint you.

So how do you find quality bargains? How can you decide if the current stock prices make sense? Does the price justify the earning prospects of the company?

The answer to these questions is: Price-Earning (PE) ratio.

Introduction to PE ratio: PE ratio is one of the most widely used tools for stock selection. It is calculated by dividing the current market price of the stock by its earning per share (EPS). It shows the sum of money you are ready to pay for each rupee worth of the earnings of the company.

PE = Market price / EPS

Assume there are two companies ‘A’ and ‘B’, operating in the same sector. If PE of ‘A’ is 30 and PE of ‘B’ is 22, then ‘B’ is considered to be a better buy, as the market price has not gone up to reveal the earnings prospects of the company. But ‘A’ is considered to show higher growth prospects as compared to ‘B’.

How does PE help?

Understanding PE gives the investors an idea if the stock has sufficient growth potential. Stocks with low PE can be considered good bargains as their growth potential is still unknown to the market.

If the PE is high, it warns of an over-priced stock. It means the stock’s price is much higher than its actual growth potential. So these stocks are more liable to crash drastically. This was evident in the recent market crash when the stocks of all Reliance companies fell sharply.

This will allow savvy investors to sell their holdings before the stock price crashes.

Drawbacks of PE ratio

Interpretation of PE ratio is heavily dependent on comparison of the company with its peers. Also PE that is considered very high in certain sectors can be considered very low in other sectors.

For instance, companies in IT and telecom sectors have higher PE ratio than the companies in manufacturing or textile sectors.

Also PE ratio is not totally neutral. Any major announcement of a major order or acquisition by the company will certainly push up its PE. On the other hand, low PE may not indicate a good buy but could signify more serious issues facing the company. So it is very important to perform a thorough research into the background of the company, before investing.

Besides EPS itself is assumed, as it forecasts future growth based on past performance. However, there is no guarantee that the company can continue to maintain its performance each year. Also the sector in which the company is operating may experience problems as was recently seen for the IT sector.

So PE ratio cannot be considered to be a totally reliable indicator of cheap, good stocks.

Yet, PE ratio remains one of the most important ratios when it comes to stock selection.

AB Bacchan

Amitabh Bacchan decides to drive his new Aston Martin luxury car and asks his driver to sit on the back seat.

A Police Hawaldar stops the car for jumping the signal.

On seeing Amitabh driving the car, he calls his ACP and asks him “Sir signal jumping ke liye gaadi rokki hai. Lekin challan nahi de sakta. Gadi mein bahut bada Sahab baitha hai. Kya karoon?”

ACP asks “Kaun sahab hai gaadi main?”

Hawaldar “Pata nahi kaun sahab hai. Lekin usne Amitabh Bachhan ko driver rakha hai.

😁😃😅😎

Amitabh shocked !

Actually AB Rocks…

#HedgeFund

Hedge Fund

Hedge fund is a private investment partnership and funds pool that uses varied and complex proprietary strategies and invests or trades in complex products, including listed and unlisted derivatives. 

Put simply, a hedge fund is a pool of money that takes both short and long positions, buys and sells equities, initiates arbitrage, and trades bonds, currencies, convertible securities, commodities and derivative products to generate returns at reduced risk. As the name suggests, the fund tries to hedge risks to investor’s capital against market volatility by employing alternative investment approaches. 

Hedge fund investors typically include high net worth individuals (HNIs) and families, endowments and pension funds, insurance companies, and banks. These funds work either as private investment partnerships or offshore investment corporations. They are not required to be registered with the securities markets regulator and are not subject to the reporting requirements, including periodic disclosure of NAVs. 

There are many strategies a hedge fund may use to generate returns. One such strategy is global macros, where the fund takes long and short positions in large financial markets based on the views influenced by economic trends. Then there are funds that work on market-neutral strategies. Here, the goal of the fund manager is to minimise market risks by investing in long/short equity funds, convertible bonds, arbitrage funds, and fixed income products. 

Another type includes event-driven funds that invest in stocks to take advantage of price movements generated by corporate events. Merger arbitrage funds and distressed asset funds fall into this category. 

Perpetual Bond

#Perpetual Bond

Perpetual bond, which is also known as a ‘perpetual’ or ‘perp’, is a bond with no maturity date. The issuers pay coupons on perpetual bonds forever, and they do not have to redeem the principal. Perpetual bond cash flows are, therefore, those of perpetuity.

A perpetual bond works like a life-time, irredeemable fixed deposit, with bond holders getting fixed coupon every year. In India, due to rate volatility, issuers fix a call option, which could be activated after 5 or 10 years, giving investors an exit. These bonds typically have a face value of `10 lakh and trade in the wholesale debt market in lots

Under the Basel-III requirement, an international capital standard, perpetual bonds or AT1 securities are more of a quasi-equity obligation. If an issuing bank incurs losses in a financial year, it cannot make coupon payment to its bondholders even if it has enough cash.
Moreover, if the equity capital of the issuer falls below 6.125%, the entire investment of bondholders would be either written down or converted to equity.

IPhone

Mehnat Karo 

Aise links click karne se I phone kiss my phone but naji millegaa.
If you get such messages check

आखरी दिन iPhone 7 Red जीतने का| क्लिक करें 😂😎😃

Control your Greed

Happy Investing

Important-

With markets touching all time High !! As an Smart Investor just keep your self away of Fake News and Noise !!!  

Belief in news is a mess. As we have seen in Brexit, US Elections, and even Indian elections like Bihar and UP, the mainstream news is not always clued in to public sentiment. Just believing that news reflects sentiment is not correct; sometimes the news itself is used to “create” sentiment, and many times the reality is different. You have to now distinguish between: Signal, Noise and Bias.
Happy Investing and remember this story before investing in Fake news !!

In the epic Mahabharata, there is a battle going on between Drona & Arjuna with no end in sight. With Arjuna being unable to bring down his Master, Krishna devises a way to make Drona surrender. He asks Yudishtara to proclaim “Ashwathama Hatha, Iti Narova KunjaRova”. The first part of the proclaiment is about Death of Ashwathama. Ashwathama is the name of Drona’s son. The second part means that the death was of an Elephant, not Drona’s son.
While the first part is heard by Drona, the second part is not heard since it’s accompanied by noise. Drona hence assumes that it’s his son who has been killed and drops his defense.