How irrational markets can remain?

I will provide two examples of irrational markets.

The first one is of Timken India. This is a bearing manufacturer. It was started as a joint venture between Timken USA and Tata Steel both holding 40%. In 1999, Tiken USA acquired the remaining 40% stake from Tata Steel. During the boom times of 2005-2008, the share price hovered between INR 120 and INR 180, almost 5 to 7 times its price of INR 25 in 2003. Till CY2007, the company's EPS never went above INR 6. Thus the company was always trading above P/E of 20 and never fell into the value criteria. Fast forward to future and the company made EPS of INR 8.32 in CY2008 and the price fell to INR 50 during the carnage of October 2008, very near to its book value of INR 47. The market cap of the company at that price was just INR 320 Crore. Even today, the share price is hovering around INR 90 with a market cap of INR 575 Crore. The TTM profit is INR 48.96 Crore making a P/E of 11.75.

The other company I want to talk about is Fedders Lloyd. The company's share price in 2006-2008 bull market traded anywhere between INR 100 and 200. The company made an EPS of INR 6.26 in FY2007 ending in June 2007. Thus the P/E ratio was never below 20 making the share out of investment horizon for value investors. Fast forward to future and the company made an EPS of INR 7.28 and INR 4.12 for FY2008 and FY2009. The share price in October 2008 fell as low as INR 16, a P/E of just 2.2. The market cap of the company at that price was just INR 50 Crore while net current assets stood at INR 160 Crore and debt at just INR 75 Crore. If you had liquidated the company, you would still have got 95 Crore and more for its real estate and plant machinery. The share price has run up to INR 37 and even today the P/E ratio is just 8.98 with market cap just INR 110 Crore.

Can you guess from this how many good years' of earnings the stocks were discounting in the bull market of 2005-2008? There are many such examples and I have already talked about some of them like Gulf Oil, etc. earlier. Whenever somebody quotes a price to you, take it with a pinch of salt. Even if everybody agrees with him.