PE ratios have been the yardstick to measure, on face value, how cheap or expensive a stock is. Naturally, Low PE Shares are preferred over High PE shares as they appear ‘cheap’.
Interest Rates and PE ratios have a weird connection. Interest rates influence the movement of stock prices. If interest rates around the world stay where they are – stocks are incredibly cheap. If interest rates increase by 4% – then stock prices and naturally, PE would tumble.
There are two main reasons for this –
- Companies get loans at a higher rate which affects their earnings and therefore growth.
- People get better investment opportunities as a result of which they take their money out of stocks.
For curious investors, the ratio is not the same and the effect does not cancel out.
There is also a curious idea of ‘High Quality’ companies. These are companies that follow high standards of governance and have a proven track record of performance. Typically, BlueChip companies are regarded to be ‘quality’ but that isn’t necessary. Buying such quality low PE shares(when available) is a chance to make serious wealth.
Low PE Stocks
Buying things cheap is the way to make money. It is mathematically impossible to make money on something that you have overpaid for. Unless you believe in a “greater fools theory” – you cannot buy an overpriced stock and expect to make money on it.
It’s a Tata company so corporate governance is no issue. The company has the MOAT that provides it with a low cost structure that boosts its EBITDA. If the China +1 theme plays out or CapEx cycle restarts – investors are in for a treat.
Tata Steel is a no-brainer at a single digit PE.
Kanchi Karpooram Ltd.
Rising ROCEs, falling working capital cycle and an increase in assets – it really makes you wonder how a company is available so cheap. The company’s reserves are rising and currently, it is a 0-debt company.
The current PE is at a mere 6.
Kilpest is into Crop protection, Public health products and bio-products and is also a supplier to various Govt. organizations.
The company has rising ROCEs, rising assets and falling debt.
This stock however, is still under the process of conversion – it can be a deep value stock or might even be a value trap.
Investors are advised to proceed with caution with this one.
Well the PE isn’t in single digits but it sure is a value stock that in our opinion, is extremely undervalued. ITC has been amongst the best performing stocks in Indian History.
The company’s ROCEs are rising, the company’s margins are rising and the management is keen on entering into various segments.
It won’t be a stretch to compare Amazon and ITC. Amazon has a cash cow called AWS and ITC has two – the tobacco business as well as their IT hand.
Yes, the EV revolution is here. Yes people want sustainable development but we really can’t switch overnight.
Coal India is mainly engaged in mining and production of Coal and also operates Coal washeries.
While there are concerns about the negative Sales Growth, the company’s ROEs have consistently averaged over 50%. Not only this, the company also delivers a health dividend.
At a PE of 7, it seems like a bargain.
What is a good PE ratio?
Truthfully, there is no answer to that question.
The thing is that PE ratios are dependent not only on interest rates but a variety of other factors. The most important of these factors is the mood of the general public.
For Example: if there is exuberance, the average PE will be very high and the exact opposite in case there is uncertainty. While there is a lot of importance given to PE – it is no way a yardstick.
A high PE is no reason to sell a stock and a low PE is no reason to buy a stock. You can make money with PE over 100 and lose money in Low PE Shares.
The most important factor is what the business delivers over its lifetime. And answering this question is really tough and unfruitful and for that reason, an often debated argument is Active Funds vs Passive Funds.
Disclaimer: The views expressed by the writer are their own and not of the website or the management. The writers may or may not have a stake in the mentioned companies. Readers are requested to consult a SEBI registered investment advisor and make a decision accordingly.