Over 150 stocks in BSE 500 trade below 5-yr average PE
Stocks with a lower PE are considered reasonably valued as their growth potential is still untapped whereas higher PE signals an over-priced stock.
There is one thing which investors will not leave hunting for and that is ‘value’. Equity investors are always on a lookout for stocks which are trading at fair or below valuations compared to long-term averages.
Price-to-earnings multiple is one of the measures which can be used to scan stocks trading at attractive valuations. It is one of the widely=used value indicators for stock investment and is perceived as an important indicator for long-term investment decisions.
A scan of BSE 500 stocks threw as many as 164 companies which are trading at a discount to their 5-year average PE including names like Swan Energy, Jubilant Life Sciences, Century Textiles, BEML, Magma Fincorp, Ashok Leyland, etc., according to data from AceEquity.
The general rule of the thumb is — stocks with a lower PE are considered reasonably valued as their growth potential is still untapped whereas higher PE signals an over-priced stock.
However, analysts beg to differ. For long-term investment decisions, investors should use more than one valuation parameter to select stocks rather than just looking at one, because PE ratio is not an isolated indicator of valuation.
A stock trading with lower P/E in comparison to industry or their average certainly offers a proposition for value hunt, but apt cost is something that investors should study upon. Even though short-term challenges can be overlooked but overall business should have sustainability in terms of revenue generation in a longer timeline supporting the investment objective
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