Are stock valuations cheap now?

Feb 7, 2011

In this issue:
» Worst performing sectors since November
» This shows bull market in gold remains intact
» India worries over oil bill as Egypt burns
» Illegal money continues to flow into India
» ...and more!!

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The 'buy and hold' philosophy has been talked about as one of the key mantras for long term investors. But a stock is not like a high performance motor cycle where you simply 'fill it, shut it, and forget it'! A stock is a share in a company, and its performance depends on how the company performs in the short term and more importantly the long term. In the short term however, there are more variables than just the company's performance that decide a stock's movement. The volatile mood swings of investors, the economy, and currency are some of these factors that conspire to make the stock dance to their tunes in the short term.

What we are seeing now in the Indian stocks markets is exactly that. More than company fundamentals, other external factors are driving stocks and their valuations. And as we see from our perch, things do not seem bright as of now. At least not as bright as they seemed till about three months back when the Sensex had hit its post-crisis peak.

So the foremost question on our mind is - Are stock valuations cheap now…after the recent correction?”

The answer is - Yes and no! It entirely depends on what you are looking at.

If you are looking at the BSE-Sensex and its current P/E of 19.8 times, it is still trading around 9% higher than its ten-year average P/E of 18.2 times. So that looks reasonable but not cheap. But when you extend your analysis to include more than the top 30 stocks, some value seems to be appearing there.

We are however still far from a situation when we can say with confidence that 'stocks are cheap'. But looking at the concerns around us, there are chances that we may get there.

So, do you think that stocks have fallen to cheap valuations after the recent correction? Share with us or post your comments on our Facebook page.

 Chart of the day
Today's chart shows the BSE sectoral indices with the biggest declines in P/E ratios since November 2010, when the Sensex had hit its recent high. The BSE-Oil & Gas index's P/E has declined the most - by around 41%. This is closely followed by the BSE-Realty index, whose P/E has come down by about 40%. As compared to these, the BSE-Sensex has done much better with its P/E down by 18%. During this period, stocks from the IT sector have done the best. The BSE-IT index's P/E has actually recorded a marginal rise.

Data Source: CMIE Prowess

Anyways, Indian markets had a mixed day today. While the BSE-Sensex of large cap stocks was trading with gains of around 100 points (0.6%) at the time of writing this, mid and small-cap stocks were facing selling pressure. Other key Asian markets also closed mixed today. While Japan and Korea closed with 0.5% gains each, Hong Kong (down 0.6%) and Singapore (down 0.4%) ended in the red.

Sample this. As per Businessweek, January was the worst month in two decades for precious metals such as gold and silver. Furthermore, hedge funds have cut their bets on higher gold prices by a strong 42% since October last year. In other words, the smart money doesn't look all that bullish on the future prospects of gold and silver. Thus, should a small investor do likewise?

Certainly not we believe. Problems with respect to the developed economies are still far from over. They are recovering alright but most of it is through stimulus money. Structural deficiencies still abound. And until these are resolved, faith in paper currencies will keep waning whereas the same in precious metals like gold and silver will keep going up. Little wonder that even after the worst month in two decades, investors still have a US$ 102 bn bet on higher gold and silver prices in the future. This is not to imply that there will be no further correction. There sure can be. But it should be viewed as an opportunity for buying more rather than getting nervous we believe.

US$ 462 bn is quite a lot of money, isn't it? This amount can wipe out India's external debt, plug the fiscal and trade deficits, and leave enough to fund the defense budget. India would experience a Cinderella-like story if so much money poured in to do all the above mentioned cleaning. But what if all that money actually belonged to the country? The US$ 462 bn is the present value of India's total illicit flows from 1948 to 2008 as estimated by Global Financial Integrity (GFI) agency. According to GFI, close to three-quarters of illegal funds are deposited overseas.

But will that money really come back? Finance Minister Pranab Mukherjee has said that his government plans legislation and diplomatic treaties to bring back illegal funds from overseas and prevent such flight. There could be some announcements in the Budget. We're keeping our fingers crossed.

The world is burning in the fired up inflation. The fire is fuelled by higher food and energy prices. A major cause of this price rise has been the flood of money printed by the Feds. But Ben Bernanke, chief of US Fed, is oblivious to the pain of the global community. He has acknowledged the rise in energy prices but states that 'underlying inflation' remains low indicating that economic recovery is not going as planned.

This means that 'the US can continue to print money. All this will eventually help in bringing US out of its worst ever economic slump. He goes on to state that the rise in energy prices is thanks to the political turmoil in Egypt. Obviously the rise in food prices is because of increasing demand. But then does that mean that the world has suddenly started demanding more food? And the oil prices were up even before the turmoil in Egypt. So who is really responsible? Isn't the free flow of money from US to blame at all? Mr. Bernanke doesn't seem to think so. He is only concerned with what happens in US.

We appreciate his concerns for the US. Whether his measures work or not is a separate question altogether. But for now, we wonder whether pulling US out of a slump by setting the rest of the world on fire is the right way of doing things.

The ongoing Egypt crisis has given the Indian government a lot more to worry about. Leading the top of the pack is the spike in oil prices. Since India imports almost 70% of the oil that it consumes, a rise in oil prices means that the oil import bill will also increase. This in turn would worsen the current account deficit, which Finance Minister Pranab Mukherjee opines has been manageable until now!

Also, because of high inflation, the government has not been too keen to pass on the impact of oil prices to consumers. Thus, it has been subsidizing crude prices at the retail level and compensating oil companies by giving them oil bonds. Rising crude prices automatically translates into higher subsidies which will put additional pressure on the government's finances. Little wonder then that the Indian government is on tenterhooks.

 Today's investing mantra
"The investor should have a definite selling policy for all his common stock commitments, corresponding to his buying techniques." - Benjamin Graham

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14 Responses to "Are stock valuations cheap now?"

Piyush Upendra Singh

Feb 10, 2011

At this juncture, intuitions does indicat that the market might just bottom out in a course of time. One might just cherry-pick for the sake of bulls; else, there are no technical indication to support any kind of short-term buying. Else, what bothers me is the post budget period -- which if not ridden by the bulls can be seriously detrimental for Equity as an asset class, & might just incur panic for the institutions too.



Feb 9, 2011

Stock prices will never reach 2008-2009 levels. The SENSEX had reached 8000+ at that time, after reaching a peak of 20000+. Now the SENSEX has touched 21000+ and has receded to 17000+ and howering around 17000-18000 levels. This is the right opportunity to buy stocks. Buy in sectors such as IT, Finance and Auto. In the latter two sectors, valuations are good and in the IT sector, growth is driving the prices slowly up .



Feb 9, 2011

Stock valuations can't get better this. This is, perhaps, the right opportunity to invest and make use of the opportunity the current markets offer. Buy on dips.

Keep driving the market, by staying invested. Growth is a way of life and everything will grow with time. The rate of growth can be enhanced by your actions.


Daniel Menezes

Feb 9, 2011

Yes and no! It entirely depends on the exteral forces.
If US want India to shine only it could happen. India cannot even think of China in competition and comparison because of loopholes in policy making due to corruption. every official is thinking of making easy money and siphon to Swiss.



Feb 9, 2011

No stocks are no yet looking cheap, but further correction will bring the most of the stocks at cheap levels. Nifty below 4900/4800 mark here we can get most of the blue chips at cheaper prices. Again it depends how one can plan to invest. ,invest 50% of capacity at NIFTY 4800/4900 levels & REST 50% Near 4000.



Feb 8, 2011

current political situation of india are worst economy grow in this condition no one can judge so as a investor i invest in market only at 4800 nifty only 50%of my cash then we have to see the situation and make the judgement to other portion invest.



Feb 7, 2011

Stocks are by no means cheap. Unless one buys at attractive prices, there is very little chance that one will make good profits. Your own role model Buffet is a testimony to that.


ajit maiti

Feb 7, 2011

In my view, at present stock prices is reaching their fair value only, not cheap. As I remember just before one year from now when Nifty was climbing up beyond 5000, retail investor went out slowly. But Index ultimately achieved record high due to only by foreign currency. So at present, nifty of 5300-5400 is arriving its fair value only. However certain stocks are hammered down due to some obvious reason.
So I think we can start buying now at slow pace based on stock quality first, then valuation.


Sanjay Kumar Tiwary

Feb 7, 2011

Rightly mentioned by you valuations are reasonable but not cheap.I personally don't believe in bottom fishing ,simply see the sectors which is more like to grow then select any among top 3 companies of that particular sector.


Vikas Gadgil

Feb 7, 2011

I think stocks will go down by further 10% because of food inflationary pressure, financial scams in India and less Govt. spending on Infrastructure development projects and higher interest rates

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