I have been follower of markets since 2017-28 and serious learning started only in last 2 years i.e. after 2021. I’d like to share my observation with data wherever possible which may help in avoiding some mistakes for retail investors like me.
I’d like to kickstart this topic with how entry valuations and market/sector cycle has a major impact on returns. In last 2 years this has been observed in IT cos, Chemicals etc. I’m mentioning some examples for better understanding
| Scrip | Price on date | Valuation on date | Returns now |
|---|---|---|---|
| Wipro Ltd | 715 on 31 Dec 2021 | PE of 31.5 | CMP 380 (drawdown of 46% in 22 months) |
| Happiest Minds | 1500 in Jul 2021 | PE of 135 | CMP832 (DD of 45% in 27 months) |
| SRF Ltd | 2400 in Oct 2021 | PE of 46 | CMP ~2200 (no returns in 24 months) |
| Divis Labs | 5370 in Oct 2021 | PE of ~70 | CMP 3400 ( DD if 36% in 24 months) |
| Britannia | 3900 in Aug 2020 | PE of 55 | CMP 4500 (just 15% returns in 3 years) |
| TTK Prestige | 1400 in Nov 2021 | PE of 54 | CMP 792 ( DD of 44% in 1 Year) |
| Dmart | 5324 in Oct 2021 | PE of 314 | CMP 3665 (DD of 30% in 2 years) |
| Sona Comstar | 790 IN Dec 2021 | PE of 200 | CMP 550 (DD of 30% in 22 months) |
The above data indicates that if one is not concious of the valuation (specailly when margins are at peak) may result in drawdowns and years on no to negligible return. I tried to mention examples from different examples to consider the broader market.
Notes:
- At bottom of the cycle a co may look optically expensive in P/E terms. But that may not necessarily be over valuation
- Even if the PE is expensive for some cos, still the return may be good. There are many examples in India including Asian Paints, Titan, etc.
- The data is selected to make a point, so the inferences from this may not hold true for all the stocks or in all kind of market cycles
My lessons and key take aways:
- Respect valuation, especially in a cycle top
- Not all stocks may face time or price correction. But better safe than sorry
- Derating is a Beyotch. Better stay away where there is chance for derating
- In a market with 1000s of listed cos, why stick with a co with chance of derating, when there could be other opportunities with profit growth and rerating
Disclaimer: All the info is for knowledge purpose and not 100% backed up concrete data/research. The reader is advised to do their one due diligence.
I may be a shareholder of some of these cos in past, present or in future
Please feel free to share any examples that support or negate the info/data shared
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