Saturday, April 25, 2009

Let's discuss P/E

The biggest criteria for selection of a stock for Ben Graham was P/E. Most of the people talk about a stock or index trading at a P/E ratio of X or Y. But Ben Graham never considered one year's results very important. He always liked to take averages. So I took five year averages of Nifty EPS and calculated Nifty P/E for average of five years earnings. Since the Nifty P/E data is available only from 1st January 1999, I could only start my average EPS from 1st January 2004. We had seven significant corrections between January 2004 and today. The P/E ratios of Nifty at the peak and at the bottom of this corrections were as below:

Top StartTop Nifty P/EBottom EndBottom Nifty P/E
9 Jan 20042817 May 200419.32
8 March 200526.4629 April 200522.6
4 Oct 200528.9128 Oct 200524.78
10 May 200636.1714 June 200624.85
7 Feb 200735.045 Mar 200729.17
8 Jan 200842.5127 Oct 200814.68
10 Nov 200818.29 Mar 200914.21

The Nifty P/E of last five years' average EPS had rallied to 19.01 till 15th April but has come down to 18.93 as of 25th April. The 14.21 P/E of Nifty's average EPS of last five years is the lowest among the last five years. The investors really remained very enthusiastic between 2004 and 2008. At the peak of 8 Jan 2008, the ratio of last year's EPS and average of five year's EPS was about 1.53, high compared to 1.15 today. The P/E fell below 20 only after 15th October when Nifty went below 3500 and is below 20 over the last six and a half months. It seems good investment opportunities were searching for investors in the last six and a half months. Where were you?
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