Beruflich Dokumente
Kultur Dokumente
February, 2010
Index of Contents
Preface
Approach III Buying Stocks With Low Price in Relation to Liquidating Value
10
11
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Preface
Stock markets had a bumper 2009. And those who invested at the right time would be laughing
their way to the banks. But what about those who missed the rally? They would certainly be
itching to make up for lost time and invest right away.
However, it may not be that easy anymore. The huge run up in stocks has done one harm. It has
made valuations expensive and thus there are fewer stocks that are available at cheap valuations
than what was the case in March 2009 when the current rally started.
But why look for cheap stocks? Will any good stock not suffice? Certainly not!
Buying stocks should not be different from buying things on sale in a supermarket or waiting for
the car companies to offer special incentives. The time to buy stocks is when they are on sale
i.e., selling cheap, and not when they are priced high because everyone wants to own them.
The objective of this report is to validate this very fact stocks selling cheap tend to give better
returns over a long period as compared to those selling at expensive valuations, all things
remaining same.
As part of the analysis that went into preparing this report, we dug deeper into history and
studied whether the approach of buying cheaply valued stocks has delivered good returns over
the long run. For the purpose of our analysis, and to be in sync with the current times, we took a
time in history when the broader stock markets were expensively valued as they seem to be as of
now.
The year we have used as our base is 2000 - when the dot-com bubble was in its prime and the
benchmark BSE-Sensex was trading at around 23 times earnings.
And what has been the conclusion of our study?
Less valued stocks, bought even when the markets were seemingly expensive like they were in
the year 2000, have performed brilliantly over the next ten years. Whether one bought stocks
trading at low P/E, or low P/BV, or even low liquidation value (we will explain this in a bit), the
returns have been great.
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Using this analysis as a backdrop, we have compiled some lists of stocks that pass these low
priced criterion as of now. You can treat this as a universe from which to find your next multibagger stocks.
But just a word of warning here these lists present just the universe of stocks that pass these
criterion. One still needs to analyse a companys past performance record, its management
credibility, and future prospects before making the final buying decisions.
We hope this report is of some help to you in your search for some brilliant long-term
investment opportunities.
Heres to your long term financial well-being.
Warm regards,
Team Equitymaster
Page 3 of 16
The fact that buying low P/E stocks can get you better returns than stocks trading at high P/E is
validated by the under-mentioned chart. It shows the average returns of stocks over the past 10
years across different range of P/E multiples.
2,000
1,500
1,000
500
0
<5
5 to 10
10 to 20
20 to 25
P/E in January 2000
>25
As the chart shows, stocks in the year 2000 with P/E multiples of less than 5 times, or even
those with multiples of between 5 and 10 times, have generated the biggest returns over the
following ten years.
Remember we are talking of a year when the dot-com bubble was at its peak, and so were Indian
markets (BSE-Sensex) that were trading at a P/E of almost 23 times. Needless to say, returns
Four Proven Approaches to Picking Multibagger Stocks
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from the Sensex since then till date has been just around 200% that will form part of the
category that has generated the least return as per the above chart.
But even if one had picked up low P/E stocks (P/E of less than 10 times) then, the returns till
date would have been spectacular. As against this, those who picked up stocks with P/E
multiples of over 10 and 20 times have generated considerably lesser returns. The performance
of stocks trading at above 25 times has been poor to say the least.
It must be noted that the analysis for this chart excludes small-cap companies, or those with
market capitalisation of less than Rs 10 bn. This does away with the argument that the base for
fastest growing stocks might have been lower. The analysis also excludes stocks of banking and
financial companies, as P/E is not the right metric to assess their valuations. Price to book value
is, as we will study in the next chapter.
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1,500
1,000
500
0
<1
>3.0
See for instance the chart above. Stocks trading at P/BV of less than 1 time or even 1.5 times in
the year 2000 have far outperformed those that traded at a higher valuation (1.5 times and
above). Analysis for this chart also excludes companies with market capitalisation of less than
Rs 10 bn.
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Based on this analysis, it becomes clear that buying a basket of low P/BV stocks may get you
outstanding returns over the long term. But you may do even better if you can determine which
of the low P/BV stocks are worth purchasing and which are about to go bankrupt. Looking for
companies with a good overall track record, and manageable to low debt among stocks trading
at discount to their book value can present great investment opportunities.
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Page 8 of 16
February, 2010
3,000
2,250
1,500
750
0
<5
5 to 10
10 to 15
>15
MC/NCAV (Times) as in March 2000
MC-Market capitalisation, NCAV Net current asset value; Data Source: CMIE Prowess
Excludes banking & financial companies, and stocks with market capitalisation below Rs 10 bn
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Disclaimer: Stocks listed in the following four tables are just representative of the ideas
and must not be treated as recommendations from Equitymaster
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P/E
2.52
4.56
4.77
5.07
5.39
5.50
5.71
5.83
6.06
6.39
6.70
6.71
6.76
7.16
7.35
7.37
7.42
7.71
7.71
7.97
8.00
8.10
8.11
8.29
8.29
8.39
8.45
8.57
9.07
9.26
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P/BV
0.47
0.56
0.71
0.74
0.74
0.78
0.82
0.83
0.87
0.90
0.91
0.93
0.93
0.93
0.96
0.97
0.99
1.00
1.00
1.03
1.03
1.03
1.05
1.07
1.07
1.09
1.11
1.11
1.11
1.12
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MC/NCAV
0.7
1.4
1.4
1.4
1.8
1.9
2.0
2.0
2.0
2.2
2.2
2.3
2.3
2.5
2.5
2.7
2.8
2.9
3.0
3.2
3.3
3.3
3.4
3.4
3.4
3.5
3.5
3.8
4.1
4.1
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Graham multiple
2.8
4.1
4.6
5.5
5.6
6.5
6.5
6.7
6.9
7.5
7.7
7.9
8.8
9.2
9.3
9.4
9.8
10.3
11.2
11.3
11.5
11.6
11.7
12.2
13.7
14.2
15.1
15.6
15.8
15.8
Note: Data as on January 20, 2010; Click on the company name to get more information on the stock;
Excludes banking & financial companies, and stocks with market capitalisation below Rs 10 bn;
Source (for all tables): CMIE Prowess
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To know more about how Equitymaster can help you earn extraordinary returns, call us at 1800209-3786 or Email us at info@equitymaster.com. We will be delighted to hear from you!
Disclaimer
This booklet a) is for Private Circulation only and not for sale. b) is only for information purposes and Equitymaster Agora Research
Private Ltd (Equitymaster) is not providing any professional/investment advice through it and Equitymaster disclaims warranty of any
kind, whether express or implied, as to any matter/content contained in this booklet, including without limitation the implied warranties
of merchantability and fitness for a particular purpose. Equitymaster will not be responsible for any loss or liability incurred by the user as
a consequence of his taking any investment decisions based on the contents of this booklet. Use of this booklet is at the users own risk.
The user must make his own investment decisions based on his specific investment objective and financial position and using such
independent advisors as he believes necessary. Information contained in this Report is believed to be reliable but Equitymaster does not
warrant its completeness or accuracy.
Four Proven Approaches to Picking Multibagger Stocks
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