Quality Stocks Call For Premium Valuation!
Nothing much has changed over the last one week in the markets in terms of Nifty levels, as Nifty trades near about the same level as it was on the last Thursday. We had anticipated it in our previous editorial that consolidation is the need of the hour and this is what markets had to offer this week! But action wise, it turned out to have more zing than most fictitious drama films filled with a lot of twist and turn! One of the key factor that drove the markets during the week was ‘Coronavirus’ However, the market breadth was a major concern of our stock markets as the breadth was not so encouraging and if we put it in a simple term, the generals were marching ahead, but the troops were not seen following as enthusiastically as expected. This means, the index heavyweight saw a good momentum whereas, participation from the broader indices was shallow.
Other news during the week which grabbed a lot of attention was that the market capitalisation of Avenue Supermarts, the firm that controls supermarket chain DMart, went past Rs 1.50 lakh crore mark as well as the stock traded at a staggering P/E of 127. Yes, you heard it right! P/E of 127! And still, the stock has not run out of steam as it continues to surge higher. The first reaction when one hears about a P/E of 127 is that the stock is too expensive. Market pundits, while conversing about stocks, often talks about the stocks as being ‘cheap’ or ‘expensive’. When market experts call a stock expensive, they’re often referring to a stock’s Price-to-Earnings ratio (P/E). This valuation metric tells you how much the market participants are willing to pay, in terms of a stock price, for the earnings a company produces.
So now the big question arises, whether or not, one should look at P/E ratio to determine to buy or sell a stock. “Contrary to what many believe, the stock market doesn’t trade on objective, mathematical measures of ‘intrinsic value’ such as P/E ratios or book value. “If analysing balance sheets were the Holy Grail for stock investing, accountants would be the world’s greatest trades.”- Mark Minervini. If one would have used P/E ratio for deciding whether to invest or not in the case of Avenue Supermarts then, one would have not invested in this company because it looks so expensive theoretically. If we face such a problem then, what is the solution for market participants? To value great businesses, one needs to look at the key aspects like-moats, quality management, size and margin of safety, etc. One also needs to understand where does the economy currently stand historically, as we have seen that when there is a skepticism about economy growth, at times where recession fear have run rampant against this backdrop, the demand for stocks where there is moat, quality management, size of market and limited downside is on upsurge and the superficially cheap stocks gets out of vision of the market as market participants are ready to pay extra premium for a quality stock, management and earnings visibility.
On the domestic front, doubts on the recovery process of the struggling Indian economy are again at forefront as the IIP contracts 0.3 per cent in December, against a growth of 1.8 per cent in November. Alongside, the retail inflation accelerated to 7.59 per cent in January against 7.35 per cent in December.
Going ahead, one of the key monitorable factors for the markets across the globe would be the updates on Coronavirus. Any pleasant news on this front would cut loose the bulls, while any depressing news on this front would certainly induce volatility in the markets. In the nearterm, the 12,000 mark is an important support of Nifty.
