I look at a lot of parameters before investing in a stock, so this is a difficult question to answer. But I will give you a 3 step process to decide on an investment.
- Calculate expected EPS growth for next 2 years for stock and Market/Sector (expected EPS after 2 years / last reported EPS-1). Lets say expected EPS growth of stock for next 2 yrs is 10% and that of market (NIfty) is 7%. So stock is expected to grow 3% more in next 2 years
- Calculate stock and NIfty PE based on EPS after 2 years (use expected EPS after 2 years in denominator for both stock and market) . Lets say stock PE comes out to be 18 and Nifty PE comes out to be 16. It means stock is trading at 12.5% (18/16-1) premium to Nifty.
- So earnings are expected to grow 3% more than Nifty, but to buy into that stock you need to pay more than 12% premium. So we can conclude that stock is overvalued. If stock was trading on a discount instead of premium with comparable ROE, then it would have been a good investment opportunity.
I personally classify an investment as long term, only if its for more than 3 yrs.