From BAAP to SAAP! Why investors are dumping high PE stocks

NEW DELHI: Dalal Street investors who were once following BAAP (buy at any price) strategy in high PE stocks are now staring at their SAAP (sell at any price) moment. A study of such high PE stocks, many of which were once fancied both by retail and institutional investors, shows that prices of such shares have fallen up to 55% in the last one year.

Shares of Nykaa, Nazara Technologies, HLE Glascoat, Privi Speciality Chemicals and Clean Science and Technology, all trading well above their industry average PE levels, are among those worst hit, shows ACE Equity data.



Multibagger Dixon Technologies, which is available at a PE of 95, has lost around 30% in a year while Jubilant FoodWorks (PE of 68) is down 35%. Top such losers include Relaxo Footwears, Godrej Properties, Sona BLW Precision Forgings, Dr Lal Pathlabs, IRCTC, MTAR Technologies, Biocon, Alkyl Amines Chemicals and even bluechips like Asian Paints and Avenue Supermarts.

Despite astronomically high PE levels, stocks of Adani Enterprises and Adani Total Gas are, however, exception as they have more than doubled investor wealth in the last one year.

"When the earnings growth was coming, these stocks could sustain those high valuation levels and now when the growth has slowed down, it is tough to justify high valuation levels," explains Amit Kumar Gupta of FinTrekk Capital.

One reason why a number of retail portfolios are bleeding is because they had heavily loaded up on ‘white elephant’ stocks during the peak of their cycle.

"Those who do not understand valuation metrics keep on buying even at high PE levels thinking that PE expansion will continue further. But the consolidation phase can be long, which means that the PE level will compress," said Kranthi Bathini, equity market strategist at WealthMills Securities.

Giving the example of diagnostic stocks, he said they were also commanding high premiums in the aftermath of the Covid pandemic. "Now as the environment has changed, they have migrated from high growth trajectory to low growth zone and as a result the stocks are also in a consolidation phase," he said.

A part of Dalal Street funds are also shifting to value stocks and where the valuation is cheaper than their historical averages.

"Investors are spotting value in PSU stocks across railways, defence, shipping and banks. In the last six months, even a large bulk of FII buying has been in financials. The leaders of the last bull cycle, whether it was IT or healthcare, are not in demand now," Gupta points out.

The smallcase manager is finding value in non-lending financials like insurance, AMCs and credit rating agencies.

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