High-Flying PE-rich stocks may not be worth your time
Desperate fund managers trying out NAV management and investors piling into just any story about growth with little regard for sober investing.
By Biswajit Baruah, ET Bureau | Updated:
It is tempting to buy high-fl ying multinational or domestic stocks at sky-high valuations. They have good fi nancial and dividend track record and the strong global linkages guarantee good export volumes insulating them from domestic slowdown fears. But the fact that they have been rising continuously despite super-rich valuations could also mean something else.
Desperate fund managers trying out NAV management and investors piling into just any story about growth with little regard for sober investing. Shares of Jubilant FoodWorks, Bosch, Honeywell Automation, GSK Pharma and others have risen up to 26% in past two months. These stocks already command a price-to-earnings multiple of 40-50 times. What’s more, the rise has been accompanied by extremely average trading volumes (see table). One reason for the surge could be an attempt to play the delisting theme though no announcements have been made as yet. Investors holding these shares or wanting to buy may need to be a bit careful.
Desperate fund managers trying out NAV management and investors piling into just any story about growth with little regard for sober investing. Shares of Jubilant FoodWorks, Bosch, Honeywell Automation, GSK Pharma and others have risen up to 26% in past two months. These stocks already command a price-to-earnings multiple of 40-50 times. What’s more, the rise has been accompanied by extremely average trading volumes (see table). One reason for the surge could be an attempt to play the delisting theme though no announcements have been made as yet. Investors holding these shares or wanting to buy may need to be a bit careful.
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For the past few years, India Inc has seen its earnings profile deteriorate amid a weak demand environment.
In line with the decline in profitability, the return ratios of the stocks have also taken a beating. As pointed out by Credit Suisse, the companies’ return on equity—which measures the degree of efficiency in utilising shareholder’s funds— has halved to a paltry 12.3% in 2015 from a healthy 23.4% in 2005.
Although RoEs have fallen in all major markets over the past few years, the contraction in India has been among the most severe. However, a handful of companies have bucked the trend to report a steady expansion in RoE over the past five years.
Here is a closer look at the five stocks which stand out among their peers.
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