Sunday, January 01, 2006

Are the market set to tank?

A question that most people are asking today. Markets are ideally guided by a lot of sentiments so I decided to fill in some numbers to check this out.

I randomly picked 170 midcap stocks (m-cap of 100 cr to 2000 cr; profitable cos.) comprising a total of 93,000 crores of m-cap. My immediate focus was an understadning of the P/E ratios of the stocks. The total weighted P/E (factoring in the m-cap of each stock) came to 31.6. This is mighty expensive.

I did a second analysis of m-caps .. this time of only the top 20 stocks (in m-cap terms) .. the P/E was 26.4. Again high.

Also let's see the rise in stock prices over the last one yr in these top 20 stocks (weighted for the m-cap aswell) - 108.18%. The profits of these cos. have increased by only 26% overall. Some people may say that these stocks were undervalued. Possible, but equity markets donot move on the whims and fancies of individual stocks. Let me prove this to you.

Look at the last one week data - the list of top gainers. Not one A cat company in the top 20 list, just two B1 cos. And yet the market was up a strong 250 points. Now in that list, the number of penny stocks (negative profits / P/E of greater than 50) - 8

Still ready to invest or, perhaps revel in cash .... !!!

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