Agreed. But there are few caveats
- Paying >6=50x P/E multiple for a co with steady state growth rate of single digits or even teens
- Paying 4x P/B for a bank (Kotak) with 14% growth rate where as same quality is available at lower P/B growing at 17% or higher
While investing in these highly valued cos the question one need to ask himself is ” Is there a similar or better quality co available at reasonable valuation ?”
In my view there are always reasonably valued cos with reasonable business prospects. It’s not very difficult to find.
Few things that people are tempted to do for several reasons but I Feel is not prudent
- Buying Innerware cos (except Rupa) at 2.5-3x sales. They are very cyclical and the average ROE is not too high above cost of capital. Ex: Rupa, etc
- Buying slow growing FMCG by paying 50-60x multiple. If one buys at these valuations, can’t expect higher returns than the growth rates. Even worse if the multiples derate. Ex: Marico, Dabur, etc.
- Buying cos like pidilite at 80x or 100x
- Buying IT cos growing in teens at 40x P/E, Ex: TCS, Infy in Fy22
- Buying Pharma/chemicals at 60-100x P/E. Ex: Divis, Amines, etc.
One should always have some margin of safety while buying either in terms of lower PEG
If someone waits for 4-7 years without any return, He’d need >25% CAGR for next 6 or 3 years to get a decent CAGR return on par with index. In a market with more than 2000 stocks, one can avoid such drawdowns with a few hours of reserch in a month
Praveen
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