One of the major points of discussion in the Dalal street is about valuation and this is what Investment looks very difficult. Valuations are no doubt an important topic but there are a lot of myths about Valuation:
- High P/E stocks are overvalued: P/E simple means (Share price / Earnings per share) i.e. For every one Rupee profit how, much are investors are willing to pay. This is one of the most favourite multiples that is used by analyst to value a stock. Many believe that stocks who have have more than 50 P/E are overvalued.
While this is partially correct but sector leading franchise business who have high growth potential in future have High P/E . While most people spend hours trying to understand what should be the P/E of a stock but last 20 years data shows strong sector leading franchises have weak correlation with P/E and share price returns.
- If a company has become large it can’t grow as fast as earlier: When people say companies like HUL, HDFC Bank have become large CAP companies they forget that all the sectors in India are currently not even reached the maturity stage. Most of these companies have huge growth potential companies. If we believe on the Narrative that Indian economy will grow up to 5 trillion-dollar Banking, FMCG, IT, Pharma has a long way to go. Today some of the renowned companies in America are trillion-dollar companies and when we compare the Indian companies with them the Indian company’s market cap is not even 10% of the American counterpart.
- High Priced stocks cannot increase much in future: This is one of the silliest misconceptions that beginners have when they enter the market. They think stocks like Page Industries whose share Price is INR 32000 is very costly but stocks whose prices are low are a bargain for them. But companies shouldn’t be judged by how high or low their share prices are.
