Irrational exuberance again? Select P/E ratios skyrocket 4 Aug 2010, 0210 hrs IST
MUMBAI: An otherwise steady stock market has an element of exuberance in it. Or, so it would appear from the abnormally high levels of price-earnings, or P/E, ratio at which many stocks are quoting in the current market. Some 30 stocks are currently trading at a PE of 1,000 to 14,500 times, and there are many others quoting at a price-earning multiple of 100 and above. Brokers say the upswing in most of the PE toppers is not justified, given their uninspiring financial performance. They also don’t rule out the possibility of a speculative interest behind such movements. However, there could be cases where companies have managed a major turnaround in their performances. Investors tend to take a forward looking approach to investing in such companies, particularly those with a good management and industry background, say brokers. One of the parameters to value a share, P/E is calculated as the current market price divided by earnings per share, or EPS. It is typically based on EPS for the trailing 12-month period. Analysts, however, say that investors should also consider projected P/E, which takes into account market expectations about a company’s future growth. If a company is quoting at a P/E higher than the industry average, that implies that the market has already discounted positive developments that are likely to happen in the future. A company with a high P/E ratio will have to meet market expectations. If not, the share price will fall to reflect the actual worth of the company. “There may be isolated instances, where share prices are being manipulated, but the broader market looks healthy, thanks to factors such good monsoon, robust corporate earnings and accelerating flow of investments in the country,” said Kisan Choksey, chairman of KR Choksey Shares and Securities. Investors should be cautious about the companies whose stocks move up despite poor fundamentals, Mr Choksey says. According to Rajesh Mittal, a senior company secretary and financial consultant, who advises companies on governance issues, it’s an alarming trend, if stocks are trading at an abnormally high P/E and investors need to be cautious about such companies. “Investors should not be carried away by inflated P/E ratios, which can be due to a number of factors and could also backfire,” he added. The latest list of the P/E toppers is not dominated by specific sectors. It, in fact, figures lesser known companies with different industry background, including Sampada Chemicals, Guj Natural Resources, Sterling International Enterprises, OCL Iron & Steel and Nikki Global Finance as the toppers. However, the alarming fact is that the number of 1000-plus P/E stocks has risen sharply to 31 in the current year compared to 20 in 2009, 24 in 2008 and 17 in 2007. Many realty and infrastructure stocks had scaled dizzy heights amid extremely bullish market conditions in 2006-07. Their valuations, however, corrected sharply in subsequent years amid the biggest crash in the stock market. -- You received this message because you are subscribed to the Google Groups "Kences1" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. For more options, visit this group at http://groups.google.com/group/kences1?hl=en.
