Overheated stocks and the amazing 20-day test
Three weeks back, I picked out a set of 24 stocks in order to arrive at certain patterns on overheated stocks (i.e. stocks to avoid now - which is as important as picking up the right ones). The list of 24 were on the basis of the biggest movers of the month and necessarily with an m-cap of 500 crs and above.
The following measures were estimated on the basis of the data available -
a) Profit for FY 2005-06 (on the basis of 3 quarters of results)
b) CMP of the stock on Jan 28th 2006 and as on 17th Feb 2006 (to calculate the fwdPE and movement in share price over the 20 day period)
The list is enclosed for your persual -
Some interesting patterns were observed.
1. Of the 10 stocks (out of 24) which had a P/E of over 40 - surpisingly only 5 stocks fell over the last 20 days, while 5 stocks actually gained thereby pushing up the fwdPE of the scrip. Shockingly, the ones that fell were within the 0-5% band while the ones that rose grew at ... 10.9%, 6.7%, 11.0% and a huge 29.1%.
2. Of the 10 stocks between a fwdPE of 20 to 40 - only two stocks went down, 6 of 'em went up while 2 remained at status quo.
3. Surprisingly, of the 4 stocks whose PE is well below the market P/E - THREE have actually performed worse at reduction in value of 13.2%, 10.1% and 11.0%.
It's as if, the market is punishing companies which are available at ridiculously low P/E and actually rewarding companies which exhibit a higher P/E.
Is this the elated Mr. Market at his very best?
We need some answers here ... fast !!!
The following measures were estimated on the basis of the data available -
a) Profit for FY 2005-06 (on the basis of 3 quarters of results)
b) CMP of the stock on Jan 28th 2006 and as on 17th Feb 2006 (to calculate the fwdPE and movement in share price over the 20 day period)
The list is enclosed for your persual -
Some interesting patterns were observed.
1. Of the 10 stocks (out of 24) which had a P/E of over 40 - surpisingly only 5 stocks fell over the last 20 days, while 5 stocks actually gained thereby pushing up the fwdPE of the scrip. Shockingly, the ones that fell were within the 0-5% band while the ones that rose grew at ... 10.9%, 6.7%, 11.0% and a huge 29.1%.
2. Of the 10 stocks between a fwdPE of 20 to 40 - only two stocks went down, 6 of 'em went up while 2 remained at status quo.
3. Surprisingly, of the 4 stocks whose PE is well below the market P/E - THREE have actually performed worse at reduction in value of 13.2%, 10.1% and 11.0%.
It's as if, the market is punishing companies which are available at ridiculously low P/E and actually rewarding companies which exhibit a higher P/E.
Is this the elated Mr. Market at his very best?
We need some answers here ... fast !!!
posted by Shankar Nath at 10:02 PM
2 Comments:
I think Prasanth will be mightily interested in this observation. Dude, you have some excellent stocks .. but they are presently in the red.
Guys, I need as answer to this one - "What makes Aurubindo Pharma command a fwdPE of 196?"
Warm Regards
Shankar
Hi Shankar,
I was just reading an article in the latest Business World which says that as per a study done by Satneet Sabharwal and Timothy Falcon Crack titled "Growth Beats Value In Indian Stock Exchange" , finds that high PE stocks outperform low PE ones. What is going on? Whatever it is, as far as I'm concerned, if a stock goes into negative territory, then all the better for me to buy and average my costs down - unless ofcourse i have made a very very foolish mistake.
I tend to agree with the opinion of the article which says that since FII's tend to invest mostly in large cap /well known companies, that may be causing this phenom. Anyway, i think if we wait long enough, this anomaly should go away.
Regards,
Prasanth
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