Ask me anything about stock valuations


#21

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.


Checklist for stock picking
#22

There are 100s of qualitative and quantitative parameters that one can analyse. So I would say if something is working for you, don’t change it :slight_smile:


#23

We use multiple data sources. But majority of our data comes from Thomson Reuters.

You are right in pointing out, that there might be a short term tax on turnover with smallcase which is not the case with MFs. But you are missing a very important point - this tax is only paid if you make money. But with MFs you keep paying 1.5-2% of your investment value (not profit) every year, whether you make profit or loss. In long term you can make way more with smallcase, compared to MFs. Please see this video for more details and graphical comparison


#24

Thanks, I loved the way you say “don’t change it”, yes this is one of the greatest advice anybody should keep in mind. If something working for you just stick with it.


#25

@Anugrah: Have you considered Capital Line and any reason why you didnt go for it ? Just asking. Have no financial interest either ways.

@Anugrah: " this tax is only paid if you make money" is kind of weird explanation as you want to invest to make money and thats a given premise. So if your argument is that if you lose money small-case works, has lost me. What is the average yearly turnover in the small cases that has the longest history and how much did it beat the index by ? That might help put it in perspective. Also please consider comparing with the right market cap index.


#26

What are the various factors a person need to consider before buying any stock? Is it beneficial to take stock tips advice from a financial advisor?


#27

We considered all the data providers and picked the one which had best data quality.

The argument is not that if you lose money, smallcase is better. The point that I was trying to convey was that paying STCG on gains is much better than paying 1.5-2% every year on the total value of your investment, irrespective of gain/loss. Would request you to watch the video link I shared in my last reply. In that video we have graphically analyzed all the cost and benefits of investing in smallcase vs MFs and how in long run you can make much more with smallcase.


#28

Various methods like discounted cash flow, dividend discount model or sum of the parts can be used to arrive at the potential fair price. The accuracy of the calculated fair price depends on the quality of input and estimates going into these models.

The good part is that we have done most of this analysis and presented the data in consumable format. You can check Price to Intrinsic Value filter inside smallcase Special filter category on screener Higher the rank, more undervalued is the stock compared to rest of the universe. You can check the definition here


#29

A multibagger is a stock that gives returns several times its cost. Usually these are undervalued companies which have recorded strong financial performance over the previous 3-4 years and have a scalable business model which will allow them to continue recording excellent financial performance and rapid growth

But there is no direct link between valuations and multibaggers, as all undervalued stocks are not multibaggers. An undervalued stock might not give good returns in long term while an overvalued stock might turnout to be a multibagger. Its about understanding the business of the company and the sector environment in which it operates. Once you have a clear understanding of the business model and sector, then only you will be able to take a better call.


#30

@Anugrah: I went through the video. You compare the returns at arround 23 mins into the video. The calculations looked off, so I actually calculated your claim of smallcase outperforming MF in the video. What I see is that with about 50% turnover in smallcase over a year-on-year and 2.7% expense on MF, indeed the smallcase is likely to outperform but not by as much as you show in the video. Do you account for STGC on the capital gains every year on in your calculations ? However, if you assume people can discover direct funds given they understand smallcase, then MF with 1.4% expense and no taxes actually works out better.
In the calculations I did I assumed a 12% CAGR on both MF and Small case as you explained in the video with an initial corpus of 50k. Can you please redo the calculations for everyone matching your claim in the video so that I can see what I might be missing ?


#31

@Anugrah i have been seeing market since around 2-3 years and recently started trading. Currently i have bought around 10-20 stocks since last month but feel that the time i entered they were all overbought or overvalued. I buy shares on the basis of future growth, recent results, quarter on quarter performance, etc. What are the indicators which can be seen to avoid buying or selling stocks at wrong times. What indicators can i see before buying any stock and what is the time frame considered for checking those indicators? Thanks.


#32

My question is
I have observed that in most of the cases of parent company & subsidary the parent company valuation of including the subsidary holding value will be at a discount.
For example, grasim industries is the holding company for untratechc cement,AB Capital and other birla companies.If the actual value of these holdings are considered they cross 1 lk crore nut it is trading at a discount at 73000 Cr.
Same with GAIL(with holdings MGL.IGL,Petronet LNG,etc),Bombay Bumrah ,etc.
What is the reason for such discount??

In similar case, what valuations we can expect for ONGC post HPCL takeover.???


#33

My question is what is the basis for valuation of Tata Motors DVR with Respect to tata motors?
It always trades at around 40% discount to tata Motors.
What is the reason for discounted valuations??
Is voting rights such important than the dividend and earnings.???


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