Trent Ltd: A Reality Check for High Flying Growth Stocks?

Trent Ltd is down more than 20% from its 52-week highs as I write this.

In other words, the stock has officially entered a bear market as a drop of more than 20% from the top is defined as a bear market.

Why this sudden bearishness though?

We can think of two reasons. First, the broader market itself is under pressure. Both the Sensex as well as the BSE 500 are down around 7% from their 52-week highs.

Secondly, Trent's September quarter results are out, and they don't seem to have gone down well with investors.

The company has reported a 47% YoY growth in profits on the back of a 39% growth YoY growth in topline.

Now, a company's stock being hammered despite a 47% growth in profits is certainly surprising.

A growth of this magnitude can send the stock price of most companies soaring. But not Trent though. The stock trades at a very high PE ratio, in the region of a staggering 170x.

Thus, investors have very high growth expectations from the stock. Looks like even a growth of 47% is not enough to whet their appetite and which is why the stock price has come under fire.

Do you know what's common between all the great investors like Ben Graham, Warren Buffett, Peter Lynch, and Walter Schloss?

They were all very disciplined in the maximum valuation multiple they would like to pay for any stock. And this number was as firm for them as a line drawn in stone.

No matter how good the management quality or how great the company's growth prospects, they rarely went beyond their respective maximum limit.

Walter Schloss rarely paid beyond book value for any stock he bought in his multi-decade career. In fact, he preferred to retire and give up money management rather than violate this buying rule of his.

Ditto for Warren Buffett. I haven't seen him pay more than 20x PE multiple for any stock that he has purchased over the last few decades.

Peter Lynch also swore by not paying more than 25x multiple for any stock he was considering buying for his fund.

This discipline is crucial as it prevents us from overpaying, a habit we can easily fall prey to, especially during the highs of a bull market. It allows us to keep our head when everyone around is losing theirs.

So, are investors losing their head when it comes to Trent Ltd? Is the 20% fall an indication that investors were too optimistic on the stock and these expectations need to be toned down?

Well, I don't remember a lot of cases where one has paid a PE multiple of close to 170x for a stock and has ended up with a multibagger. Even in a growth market like India, a PE multiple of more than 50-60x is risky and does not seem to be sustainable for most companies over the long term.

Is Trent an exception to this rule? Can it grow at very high rates for many years to come so that its current high PE is justified?

Perhaps, yes. However, when it comes to investing, it is better to pay attention to what has worked on average and not the exception.

Market beating long term returns are made when investors buy good quality stocks at reasonable valuations. This has worked well on average for most successful investors. No stock is so good that it can't be overpriced and become a bad investment.

This is an important point to consider for most investors who don't mind paying a PE multiple of more than 100x in the name of quality and high growth on a consistent basis.

Sadly, the history does not seem to be on their side. Such purchases have usually not left a good taste in the mouth over the long term.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)