In fact it was with this motive that I personally replaced media with private banks in my portfolio. I am not sure when the high PE stocks will crash but what I am sure is that someday sometime it would crash but whether that crash happens before we double our money or after that is something that can be answered only in time.

 

Coming to your argument on PRIL it does appear high PE but the price captures the value of all its upcoming bsuiensses whereas the earnings accrue only from its retailing forays.

 

On an asset adjusted basis the company is valiued at just 25 times Fy 09 earnings and that seems far more reasonable then taking  a blanket view on things.

 

If we can wait for a few months we would have valuation benchmarks for all its several busiensses set out as the company should be listing its various subsidiaries.All these subsidiaries have diluted stakes to private equity players so the benchmarking is easy and would be validated post the IPOs.

 

 

I repeat "A PE derating is the most painful thing in the world after a Doctor's injection"

 

 

 

Let's say a company is trading at a P/E of 20 - low PE by Indian standards. Because of certain factors (CAUSE), if the earnings growth outlook becomes blurry, there will be a flurry of selling (EFFECT) on this stock too - taking its P/E down to 15.

 

Examples - Some of the MNC pharma companies like Novartis/Pfizer were trading at P/E of 20 a couple of years back. Look at its P/E now.

 

Having said that, INFY/TCS hitting 52 week low has come as a big surprise to me. I have never seen these two stocks trade at  P/Es of 20 ever!

 

I did buy PRIL in the 460's a couple of months back and therefore remain invested in it.

 

A high pe stock is a larger bet on the CAUSEs to be positive and therefore inherently more risky.

 

Though it sounds logical, history doesn't seem to indicate this though. Eg: INFY has fallen 30% from it's 52 week high. NOVARTIS has fallen 45% from it's 52 week high. But Of course - one example is not enough - you can always pick another example to suit your statement

 

And yes - personally, I would think twice before investing fresh money in a large cap stock which trades over 30 P/E. - but there is no real hard statistics to prove that high P/E (30 to 40) stocks are riskier than low P/E (15 to 20) stocks - in the Indian context.

 

Do we have examples of these role models ever buying a stock with pe > 50?

 

All our role models are firangis, and they haven't seen a market like ours!

 

 

Samir Arora has the knack of buying high PE companies and staying with them.

 

The high PE is never the problem. The problem is the slowdown in earnings growth that high PE companies experience. Most of the time such a slow down is diffuclt to estimate.

 

I like looking at PE in reklation to the growth or PEG. Even in this case the PE should not be more then 30 times forward earnings.

 

 

Even if a company has several distinct businesses like RCap or ABN or PRIL, at the end of the day, those businesses are going to generate 'earnings' - otherwise it has no real value. That's why I let the real experts figure out the SOTP value - I simply look at the estimated earnings and how they arrived at those numbers!

 

 

 

http://www.thehindubusinessline.com/iw/2010/09/26/stories/2010092651161200.htm

 

1) must buy a portfolio not a standalone company. It helps to spread out the risk(read speculation for forcasting future growth)

2)Portfolio size should not big, risk spread is handled on the assumtipn that out of 10 stocks 2-3 will give strong results and compensate losses from remaining

3) Selection of companies should be based on businesses which looks scalable as well as uses franchise model

4) MCap is also to be checked for portfolio, they should show the hope for expansion with reasonable estimates

4) Growth rate should not be more than RoE

5) Hold portfolio for min 3-4 years

6) Recheck the story periodically

 

Above is the summary of Basantji's approach for justifying to buy high PE stocks. Argument is that high PE is definitly risky but above strategy has worked for him in the past so conviction is an individual matter.

 

Here is my observation on this comment:

 

1) IT story is started by few firstcomers and they noted significant growth in initial phase due to cheap talaent availability and cost arbitrage

2)In 2nd phase, many others noticed this phenomenon and strted opening their own shops thus competitions comes into picture.

3) In 3rd phase competition led to salary hikes for talent poaching and salaries are still lower than US but reducing the cost arbitrage.