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How to BUY undervalued stocks? [simple strategies] #STOCK MARKET INVESTING FOR BEGINNERS - YouTube
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hi everyone welcome to today's video so
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take a look at this particular chart it
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is of nestle p e ratio and what you
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would observe is that nestle was trading
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at a pe of roughly 50 back in 2010
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then it continued to hover around that
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mark and then over the years the pa has
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generally gone up and now nestle is
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trading at a pe of 89.90 now the reason
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why i'm telling you this story is fairly
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simple because back in 2010 if you would
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have looked at the pe of nestle you
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would have said 50p who is going to buy
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mad people will buy it it's an
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overvalued stock let me just discard it
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because i have learned that if pe is
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less than 30 go buy a stock if pe is
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more than 30 it's overvalued don't buy
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it but let us take a look at the stock
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price growth of nestle so in 2010 nestle
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was trading at roughly 25 2600 and now
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it is trading at roughly 18 000. now
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there is almost a seven time growth in
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the stock despite it having a very high
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pe right from 2010 onwards now why am i
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telling you this story because i get so
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many comments raksha this stock is
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overvalued because the p is so high if
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you go and buy it you will just ruin
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your financial well-being or akshat you
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know what coal india is trading at a pe
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of six and seven i should just literally
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jump on that stock because it has such a
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great pe so on this video i am going to
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help you demystify this entire concept
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of pe and what is it that you must do in
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order to understand what undervalued
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stocks are and where and where not this
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p e ratio is sensible to use super
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interesting video do watch it till the
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very end and also press the like button
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so that helps this video get out to more
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people and make them more aware about
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the stock markets also i would like to
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thank our knowledge partners for today
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which is ditto i absolutely love their
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product they are an excellent platform
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in terms of buying health insurance and
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life insurance i have personally
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purchased my insurance and my family
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members have also purchased insurance
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from ditto you can go and speak with
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insurance experts for free in terms of
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availing the right insurance for you
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also because the tax filing season is in
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progress you can save some money by
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buying insurance so speak with ditto
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expert they can help you explain about
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this aspect as well so do check the
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links in the description box and
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schedule your free phone call today so
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first and foremost let me help you
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demystify and understand what is the
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exact meaning and interpretation of a pe
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ratio so pe ratio formula says that p
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means price of the stock divided by
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earning per share now how do you
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calculate the price of the stock or
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earning per share you don't need to use
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math there basically pe ratio is always
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given to you so you can just simply go
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on any screener and you can identify the
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p e ratio of the stock itself so you
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don't need to run a mathematical model
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to figure out the p e ratio on your own
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what is important for you as an investor
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is to understand what is the meaning
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behind p e ratio let me clarify this
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point by giving you two specific
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examples so example number one will be
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of nestle as i showed you that the
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nestle pe is roughly around 89.90 so
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what does that mean it simply means this
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and this is the important statement that
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in order to make one rupee from nestle
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stock you have to invest 89 rupees right
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so that is what a pe of 89 indicates
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coal india has a pe ratio of 7 so what
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does this indicate it indicates that in
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order to make 1 rupees from coal india
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you have to invest 7 rupee as an
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investor at the current prices so this
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is what the formula interprets too and
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this is the easiest explanation that you
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might find anywhere now you would say
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okay this looks like so obvious why
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would i ever go to a stock like nestle
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when i'm getting something like coal
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india at seven rupees i will just invest
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my money there because i just have to
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invest less in order to make that same
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one rupee here i have to invest 89
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rupees to make that same one rupee so
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only a mad person will go and invest in
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something like nestle but here is the
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fundamental problem with that theory you
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and i as investor we are interested in
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the future prices of the stock not the
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current price per se for example if you
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and i buy nestle today we are buying it
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with the expectation that the nestle
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stock will go up in the future similarly
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if you are buying a low pe stock also
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again we are buying it with the
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expectation that this stock will also go
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up in the future so we are more worried
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about the future so what is it that we
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are bothered about we are bothered about
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the price growth not necessarily the
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current pe of the stock so what is it
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that can be inferred out of a high pe
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stock for example when we say that
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nestle is trading at a pe of 90 why
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would some crazy person go and buy it
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simply because of this equation one is
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that that people expect that the earning
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per share will go up in the future and
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as a result the entire pe will come down
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so even buying a high price share might
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be a sensible move so when you see a
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stock with a very high pe there are two
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fundamental explanations for it one is
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that the stock can actually be
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overvalued that you know what there are
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no growth prospects in it and the stock
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is highly inflated highly overvalued
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that is one key interpretation and under
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such circumstances you should avoid
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buying such stocks but the second
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explanation could be that the growth
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prospects of that stock or of that
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industry might be really really high and
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it might make sense to buy that stock
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even when the pe is quoting to be very
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very high that is the same reason why
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nestle despite having a very high pe in
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2010 it has continued to grow even its
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pe is growing right now and the company
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is expected to grow as well on the flip
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side let me talk about low pe and low
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growth company should you just simply go
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and buy a company because its pe is low
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so a classic case here will be coal
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india so if you take a look at the stock
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pe of coal india you will see seven oh
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it's just like super inexpensive let me
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just go and buy it why take a look at
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this so for example you can see that
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even since 2010 the pe of this stock has
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been trading low anything less than 30
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is considered to be traditionally
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speaking a low pe stock so it has always
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traded somewhat less than 30 in in fact
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its pe fell to all the way to 9 or 10
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here and then it climbed up climbed down
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this that and now it is roughly trading
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at 7. buying such a stock at any level
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would have made sense if this stock
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would have generated wealth for its
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stockholders so let's look at the stock
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returns from 2011 so you can see it was
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trading at 320 it went max to 439 and
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now it is trading unfortunately at 167.
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so in summary you need to remember these
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two key points one that high pe plus
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high growth companies are not
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necessarily bad for example nestle it
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can have a high pe but as long as it
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growth stays active as long as it keeps
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on giving more and more returns there is
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no problem in buying such companies even
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at high pe on the flip side point number
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two is that there are companies with
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very low p e and very low growth
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potential please don't go and buy such
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companies because even if you buy them
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at a p e of seven that p e can fall to
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even two or three so now the obvious
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question will come that okay does it
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mean that p e ratios are pretty much
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pointless the answer is yes they are
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pretty much pointless in my opinion but
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there are two key things that you must
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remember which make p e ratio somewhat
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useful the first key thing is that p e
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is a very good measure if you are doing
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relative comparison between similar
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stocks from the same industry a classic
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case in point would be the it industry
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for example if you are looking to
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compare something like tcs with infosys
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or wipro it might make sense to get an
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estimate of what the pe of these three
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stocks are if you find some odd figure
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for example if you find that tcspe is
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trading at 65 hypothetically speaking
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and infos is at 23 then you must do
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further analysis to identify why is it
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that tcs is being assigned such a high
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growth multiple so this is the first key
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utility of looking at the pe ratio the
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second key utility of pe multiple is
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that sometimes you witness really odd pe
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multiples and you must get suspicious
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about such companies a classic case in
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point is nica and here if you take a
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look at the stock pe it is trading at
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1091. now this is some crazy number now
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unless you believe that naika is going
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to exhibit such impressive growth that
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it is going to break all records in the
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world then probably this valuation makes
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sense but to cut the long story short
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you don't need to be a mathematician and
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a financial genius to understand that
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1091 pe multiple has any sense from a
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valuation perspective let me quickly
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clarify i feel that nika's business is
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very good but unfortunately as per my
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understanding it looks like an
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overvalued stock so i have stayed away
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from it not because there is something
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fundamental off in the business just
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because of the fact that the valuations
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are so rich so this is the second
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utility of pe now comes a third utility
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or third clarification around pe which
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is very important for us to understand
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and it has to do with the nature of
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business for example if you take a look
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at cash flow based companies then here
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the p e ratio is much more sensible to
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judge
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a classic case in point is something
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like hindustan unilever or something
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like nestle or something like pidelite
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or something like procter and gamble
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why because here the business growth is
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very very predictable so this earning
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thing is much more predictable so
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therefore the p e ratios are somewhat
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logically assigned so to say but on the
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flip side if you are looking at tech
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companies then estimating the growth of
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tech companies is really really
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unpredictable and extremely hard to do
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so pe multiples being assigned to
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technology companies are pretty much
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pointless because it is almost
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impossible to define that how much money
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a particular tech company is going to
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make think about it this way that for
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example if apple launches iphone 15 if
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the sales of that iphone 15 is good then
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apple is going to make crazy amount of
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money that in turn depends on the brand
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value the tech specifications that have
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been made whether the technology will be
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a hit or a mess so it is very very hard
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to predict these things for a tech
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company on the flip side if you take a
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look at cash flow based businesses that
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how much soap is hull going to sell
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estimating that demand is much much much
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much much easier and therefore assigning
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this earning multiple is very easy in
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terms of cash flow based businesses but
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not in tech businesses now if you start
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talking about next-gen tech like uipath
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or shopify and how their business model
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will evolve so pe just becomes like a
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khayali pulao right so there is no head
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or leg to that particular number when it
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comes to estimating the business model
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of these tech based companies so then
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comes the obvious question that okay if
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p is so bad then what is it that we
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should be doing rather is there a number
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specific number that we can boil our
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buying and selling decision to so
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unfortunately no you can't automate the
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stock buying and stock selling process
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if it was that simple that hey pe more
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than 30 go sell it be less than 30 go
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buy it then there would be no analysis
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required in the stock market but that is
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now how it works a better measure is to
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look at these three specific factors
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number one take a look at the macro
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growth for example india is a growing
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country it is likely to grow faster
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compared to something like the us and if
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india grows faster than estimates then
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there will be an entire re-rating of pe
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of india itself so that is the first key
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thing that you must estimate whether
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india is going to grow or not grow
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second key thing whichever industry
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stocks that you are trying to pick you
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must do a sectoral growth analysis also
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that if that sector is growing or if
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that industry is growing then it's a
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sunrise industry and it will be assigned
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a higher pe multiple third and finally
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is the firm in which you are investing
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how its profitability is growing not
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just simply revenues so if the
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profitability is growing for example if
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it is launching more products if it is
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expanding across new geographies if it
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is under doing a lot of r d effectively
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these are all signs that the higher pe
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multiple or pe expansion of this
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particular stock is going to undertake
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as long as these three things keep on
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happening even a very high pe stock will
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continue to give you excellent growth no
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problem in terms of stock prices there
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so which brings us to a very short
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discussion that what are three
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industries where i feel a high pe will
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be assigned in the future and three
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industries where i feel pe contraction
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will happen so let me very briefly give
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you a very quick commentary there so
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three industries where i feel pe
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expansion is likely to happen in india
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are number one emc and insurance
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businesses amc's already have very high
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profitability you can go and check the
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balance sheet look at the operating
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profit margins of amc companies you will
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be surprised by the profitability of emc
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companies so i am quite bullish about
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these companies same goes for insurance
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that since the insurance industry as a
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whole is growing i am bullish about the
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insurance sector in india as well
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because even their profitability will
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improve with scale second key industry i
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assume that if there are certain crypto
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based organizations in india then i
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would invest in them or do proxy
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investing in them because crypto as a
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whole will continue to grow despite
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regulations in india why is that the
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case for that you will have to watch my
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crypto videos i will not explain
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extensively here but to cut the entire
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discussion short on cryptos the entire
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asset class is growing so crypto as an
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asset class is growing as long as the
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entire asset class grows and it's a
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world dominated asset class so of course
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companies in india that are benefiting
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from this crypto ecosystem they will
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also grow quite quite aggressively maybe
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in the future 5 10 15 20 years there
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might be companies like wazirex that
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might get listed on the indian exchanges
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as well you will say akshat we have gone
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crazy no take a look at coinbase which
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is a us-based listed crypto exchange
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already trading in the u.s economy so
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similar situation can play out in india
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100 third and finally i feel that banks
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still have some steam left so i would
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assign a higher pe multiple for
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something like banks so i'm quite
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bullish about these three specific
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sectors i do feel that as more and more
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people start using more banking products
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banks will become even more profitable
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and their profitability will increase
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not because just about the volumes
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growth but because of the number of
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products that banks are selling now
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three industries where i feel that pe
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contraction will happen number one
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conventional automobiles it's almost
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given that conventional automobiles in
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the coming few decades will definitely
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shift to evs now as the price point of
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ev comes down conventional automobiles
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their pe contraction will happen and
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they will lose a lot of market share now
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if there are companies for example
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maruti if it is able to successfully
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migrate to an ev based ecosystem then of
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course a pe multiple will stay intact on
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the flip side if these companies do not
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improve if they continue to stay in
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conventional automotive space they will
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struggle and pe contraction will 100
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percent happen second key industry is
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the psu bank i feel that pe multiple of
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psu banks will keep on shrinking
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very easy to understand why because they
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are getting lesser and lesser support
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from the government over a period of
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time previously a lot of budget was
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earmarked to support and subsidize the
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inefficiencies of psu banks now that
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thing is going away unfortunately psu
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banks when compared to private banks are
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not that efficient in terms of gaining
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or building their business also so over
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time over the next two three decades psu
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banks are going to suffer even more and
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it will definitely lead to pe
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contraction third and finally i feel
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that airlines industry is also going to
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shrink for the simple fact that now we
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are moving towards a world where any
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industry that can be taxed super high it
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will keep on fluctuating in terms of
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profitability now airlines is one of the
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highest tax industries and it is
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completely under the control of the
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government so to say so they decide
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airport charges they decide hangar
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charges they decide air traffic volume
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they decide a bunch of different
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different things and it becomes really
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difficult for airlines companies to
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sustainably stay profitable so therefore
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i don't see any major airlines coming in
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india and accelerating its profitability
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over a sustained period of time having
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given this commentary i want to put a
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brief disclaimer that these are my
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opinions this is how i see the world
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progressing you don't necessarily need
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to agree with me there each of us can
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have our own viewpoints but the
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important message i want to drive home
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is use this pe framework as an indicator
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to do your own analysis
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pe standalone is a pointless ratio you
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will not be able to decipher whether a
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stock is undervalued or overvalued from
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that particular perspective a better way
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of approaching the undervalued or
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overvalued nature of any stock is use pe
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in conjunction with the business
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development framework that i just helped
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you understand i hope you liked the
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video please press the like button and i
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will see you tomorrow
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