noobsaibot's Portfolio

Alchemist

Administrator
Staff member
#21
Nestle has a P/E of 43 & P/BV of 34.
GSK P/E 31 & P/BV 10
ITC P/E 39 & P/BV 11

What upside (even limited) do you see in this? These are tremendously expensive stocks.
These stocks trade at high PEs not only because of their quality of their management but also because of the quality of their earnings.

When I just started investing, I used to think that a high PE stock is expensive and low PE stock is cheap.

However, I now I have realized why HUL rarely trades below 20 PE and most PSU banks never go above 10 PE.

It's all about cash flows.

Markets give more weight to cash flows and less to reported earnings or book values.

In the end what matters is how much free cash flow a company can generate in the long term.

For NSE Nifty

Dividend yield: 1.42%.
Price to book ratio: 3.16.
PE ratio: 19.18.

(Source: http://www.nse-india.com/products/content/equities/indices/historical_pepb.htm)

Lets take the biggest 10 companies in the Nifty and check their dividend yields.

SECURITY WEIGHTAGE(%) DIVIDEND YIELD

ITC LTD 8.43 1.61%
RELIANCE INDUSTRIES LTD 7.48 1.04%
ICICI BANK LTD. 6.81 1.55%
INFOSYS LIMITED 6.79 1.85%
HDFC LTD 6.39 1.47%
HDFC BANK LTD 6.31 0.69%
LARSEN & TOUBRO LTD. 4.89 1.01%
TATA CONSULTANCY SERV LT 3.66 1.93%
STATE BANK OF INDIA 3.27 1.53%
HINDUSTAN UNILEVER LTD. 3.24 1.32%

In spite of being an "expensive" stock, ITC's dividend is higher than the most of the bigger companies and is also higher than the average dividend yield of Nifty.

The reason is that ITC's free cash to earnings ratio is much higher.

A company that doesn't need to re-invest its profits is much better than a company that needs to re-invest its profits. The formeris likely to get a much better PE than the latter.

Besides stronger cash flows, there are other factors too why consumer goods are trading at high multiples currently like their ability to pass on costs to consumers, their growth prospects, downside earnings protection etc.
 
#22
Your post makes a lot of sense and explains very well why consumer names are justified in trading at higher PEs compared to other industries.

But do you feel this is the right time to invest in these stocks. They are trading at the higher end of their own historical valuations. At best they will underperform the market and thus entail an opportunity cost.

I agree with most of what Prudent Investor has said except for the part that these stocks are a buy at any price.

I feel the way to play them is to allocate a certain section of the portfolio to these stocks, buy them when they when they are trading cheap compared to historical level and hold them for a very long time.
 
#23
I agree with most of what Prudent Investor has said except for the part that these stocks are a buy at any price.

I feel the way to play them is to allocate a certain section of the portfolio to these stocks, buy them when they when they are trading cheap compared to historical level and hold them for a very long time.
The point to ponder here is that with great consistency of earnings, these stocks maintain their high P/Es and with higher earnings prices are bound to follow.

Just have a look at the returns generated by stocks like HDFC, ITC, at different points of time. They add a lot of stability to the portfolio which forms the base.

The second tier and third tier are the growth layers to be built on this stable base.

The problem is after facing 2008-2009 lows or even the Dec 2011 lows one gets anchored to those prices and feels very reluctant to buy at higher levels. The ideal approach would be to look at prices based on growth ahead and decide looking forward not backwards.
 

Alchemist

Administrator
Staff member
#24
$$Money$$;39836buy them when they when they are trading cheap compared to historical level and hold them for a very long time.[/quote said:
That is my strategy too.

These stocks will always trade to premium valuations compared to rest of the market.

In recent times, economic and financial uncertainty has forced investors to divert more money towards the so called defensives.

The earnings of many consumer stocks are virtually recession-proof and that makes them attractive investments in an uncertain environment.

Not all companies with good cash flows get a premium valuation.

The sustainability of the cash flows is equally important too.

BHEL is good example of a company that doesn't get a premium valuation in spite of having good cash flows.

BHEL is a debt-free company. It generates a lot of free cash. It doesn't need much cash to grow and distributes good part of its profits as dividends. It uses advances received from its clients for its working capital needs.

Yet, the stock is today trading a PE of 8.5. Some weeks back it was available at a PE of less than 7.

The problem with BHEL is the sustainability of its cash flows. Indian investment cycle is slowing down rapidly and BHEL's future earnings are no longer predictable as they were a few years ago. Actually analysts are expecting earnings to go down in next few quarters.

Further deterioration of economic conditions in India or globally will make things worse for BHEL.

FMCG companies don't have any such worries. Demand for soaps, shampoos and toothpastes is unlikely to be affected by economic crises.
 
#26
When I just started investing, I used to think that a high PE stock is expensive and low PE stock is cheap.
In general, you cannot say a stock is expensive just because of the PE especially when the PE is below 25 or so. But above that, I would generally consider a stock to be expensive.

However, I now I have realized why HUL rarely trades below 20 PE and most PSU banks never go above 10 PE.
I do not compare PEs of unrelated companies - I compare PE of companies which are in more or less similar business. However again, I have a higher limit of PE above which I wouldn't buy a stock. Do you have any such limit - i.e. if the PE of a stock is above X, I will never buy the stock, irrespective of any other parameters. It may be 25 or 50 or 100 or whatever?

In spite of being an "expensive" stock, ITC's dividend is higher than the most of the bigger companies and is also higher than the average dividend yield of Nifty.
Would you really buy ITC today when it's at its 5 year high price?

About dividends, I don't think any any stock in my portfolio where the dividend yield (as calculated wrt my buying price) is less than 2%.

That is my strategy too.
There's the catch. Many of the stocks I objected to were at their 5 year highs. Your strategy, as I understand it, wouldn't have been to buy it at those prices.
 

Alchemist

Administrator
Staff member
#27
There's the catch. Many of the stocks I objected to were at their 5 year highs. Your strategy, as I understand it, wouldn't have been to buy it at those prices.
No, I won't buy them too at these rates, but my point is that these stocks are not as expensive as their PEs look.

ITC is unlikely to fall to a PE of less than 25 except if we get a repeat of 2008 crises.

Here is the PE data (closing basis) for ITC at the peak of 2008 crisis. Even in the worst of times, it managed to trade at a PE of 18.

ITC at a PE of 20 would be dirt cheap. A PE of 20 for many stocks is ridiculously expensive.

21-Aug-08 21.85
22-Aug-08 21.99
25-Aug-08 22.24
26-Aug-08 22.38
27-Aug-08 22.19
28-Aug-08 22.25
29-Aug-08 22.83
1-Sep-08 23.27
2-Sep-08 23.40
4-Sep-08 22.83
5-Sep-08 22.92
8-Sep-08 23.62
9-Sep-08 23.44
10-Sep-08 23.54
11-Sep-08 23.18
12-Sep-08 22.93
15-Sep-08 22.68
16-Sep-08 23.26
17-Sep-08 22.17
18-Sep-08 22.31
19-Sep-08 23.12
22-Sep-08 23.49
23-Sep-08 23.43
24-Sep-08 23.30
25-Sep-08 22.61
26-Sep-08 23.01
29-Sep-08 23.05
30-Sep-08 22.59
1-Oct-08 23.27
3-Oct-08 22.90
6-Oct-08 21.82
7-Oct-08 21.62
8-Oct-08 20.18
10-Oct-08 19.89
13-Oct-08 20.41
14-Oct-08 20.41
15-Oct-08 19.32
16-Oct-08 19.69
17-Oct-08 19.20
20-Oct-08 19.98
21-Oct-08 20.59
22-Oct-08 20.56
23-Oct-08 20.65
24-Oct-08 18.82
27-Oct-08 18.00
28-Oct-08 18.72
29-Oct-08 18.84
31-Oct-08 18.66
3-Nov-08 18.86
4-Nov-08 20.74
5-Nov-08 20.50
6-Nov-08 20.42
7-Nov-08 21.09
10-Nov-08 20.80
11-Nov-08 20.85
12-Nov-08 20.45
14-Nov-08 20.65
17-Nov-08 19.89
18-Nov-08 19.35
19-Nov-08 19.99
20-Nov-08 19.90
21-Nov-08 20.40
24-Nov-08 20.69
25-Nov-08 20.41
26-Nov-08 20.75
28-Nov-08 20.77
1-Dec-08 20.05
2-Dec-08 20.53
3-Dec-08 20.36
4-Dec-08 20.89
5-Dec-08 20.34
8-Dec-08 20.53
10-Dec-08 20.53
11-Dec-08 20.62
12-Dec-08 20.94
15-Dec-08 21.09
16-Dec-08 21.39
17-Dec-08 21.01

If India's growth continues to slow down and inflation remains high, then I think these consumer stocks will outperform the broad market in the next 5-10 years, in spite of the fact that these stocks are currently trading at a premium.
 
#28
So, on a broad basis, PE indicates whether a stock is cheap or not.

So when one is choosing a stock to buy, if PE is less than 10, what all should be taken care of, like eps and p/c.

I have heard EPS and div yield are very important on stock selection. Can any one clarify this?
 
#29
noob's Portfolio updated

AshokLeyland @23.90 -- > 12.09%
DhanlaxmiBank @67.69 -- > 6.3%
GraphiteIndia @77.59 -- > 5.54%
GVKPower @16.95 -- > 1.67%
IdeaCellular @76.20 -- > 2.74%
IOB @71.72 -- > 4.7%
KECIntl @56.28 -- > 7.98%
Manappuram @33.04 -- > 9.45%
Opto Circuits @118.73 --> 7.65%
PunjLoyd @56.96 -- > 3.93%
SAIL @88.53 -- > 11.87%
SELAN @270.36 -- > 21.61%
SouthIndianBank @20.32 -- > 1.1%
Suzlon @31.43 -- > 3.29%

Increased stakes in Ashok leyland , graphite India and Sail. Reduced Idea cellular.

Added Opto circuits.
 
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#30
AshokLeyland @23.90 -- > 12.09%
DhanlaxmiBank @67.69 -- > 6.3%
GraphiteIndia @77.59 -- > 5.54%
GVKPower @16.95 -- > 1.67%
IdeaCellular @76.20 -- > 2.74%
IOB @71.72 -- > 4.7%
KECIntl @56.28 -- > 7.98%
Manappuram @33.04 -- > 9.45%
Opto Circuits @118.73 --> 7.65%
PunjLoyd @56.96 -- > 3.93%
SAIL @88.53 -- > 11.87%
SELAN @270.36 -- > 21.61%
SouthIndianBank @20.32 -- > 1.1%
Suzlon @31.43 -- > 3.29%

Increased stakes in Ashok leyland , graphite India and Sail. Reduced Idea cellular.

Added Opto circuits.
Is this a fresh position ? Please check my post in the Opto circuits thread.

I do not feel it is wise to take fresh positions at this time. We need more clarity on the cash flows and working capital front and the Crisil report before fresh positions can be added.
 
#31
Yes, it is a fresh position. I understand that considering the dark clouds surrounding opto like the cash flow, working capital and rating uncertainties, this is a risk.

I took this risk considering two past facts: very investor friendly management and the good business they are doing.

Also they have realized their current issues and have started working towards that.

What I feel is every growing company has some risks associated with. Those companies which successfully overcome them will be the winners in the long run.
 
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#33
@Prudentinvestor

If crisil comes up with a positive rating, what is your call on this scrip?

And if the rating is negative , how deep the prices will go as per your view?

Do you have holding in this scrip?
 
#34
@Prudentinvestor

If crisil comes up with a positive rating, what is your call on this scrip?

And if the rating is negative , how deep the prices will go as per your view?

Do you have holding in this scrip?
The CRISIL rating is more of a sentiment booster, it does not change the cash flows. The pain points (cash flows, working capital cycle) have no quick fixes. It will take time to fix.

a) If CRISIL ratings are positive, stock may bounce back to 135-140 levels.

b) If rating is negative it may crash below 100.

c) I have holdings in Opto which are over 1 year old. Avg price is ~ 180 (adjusted for bonus). At current prices it is about 6% of holdings. I am not adding to positions till clarity evolves.

Management has announced the following in their website:

IR Event: Investor & Analyst Conference
Tuesday, 18th December 2012 @ Trident, Bandra Kurla, Mumbai
Looks like some positive announcements might take place in and around that conference.
 
#36
What are you expecting to happen in this conference? Means what are the prospective announcements that could happen related to the current issues like WC and CF?
A lot of issues are pending. Like CRISIL rating, IPO of subsidiary, new launches in US, WC cycle improvement, etc. etc.

If management comes out and freely discusses on these topics, so as to give a clear direction of how things are moving, it will be much better for the stock.
 
#37
noob's Portfolio updated

Hi All,

Please have a look at the updated portfolio and provide the feedback.

AshokLeyland @23.90 -- > 10.88%
DhanlaxmiBank @67.69 -- > 6.73%
GraphiteIndia @79.14 -- > 6.10%
GVKPower @16.95 -- > 1.61%
IOB @71.72 -- > 4.9%
KECIntl @56.28 -- > 7.56%
Manappuram @33.04 -- > 9.35%
Opto Circuits @115.49 --> 9.79%
PunjLoyd @56.96 -- > 3.98%
SAIL @87.80 -- > 13.68%
SELAN @270.36 -- > 20.31%
Suzlon @31.43 -- > 3.55%
Hexaware @92.68 --> 1.6%


Sold Idea @ 97 and SouthIndianBank @ 26
Started adding Hexaware (new addition) and Graphite India.

Thanks.
 
#39
Well, most of the stocks are two digit stocks.

You need to exit the crummy stocks and focus on better quality.

Instead of IOB and Dhanalaxmi Bank why not consider something like a Karur Vysya Bank or Mahindra Finance.

Why are you holding stocks like Suzlon, Punj and GVK?
 
#40
I bought IOB because at the price of 70 I found it reasonable (with its pretty good div yield).

Karur and M&M are expensive (for me) I guess.

I know Suzlon and GVK have caused me losses, but now i feel like there is no more downside for them. So decided to wait a little bit longer.
 
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