“PE ratio doesn’t tell you everything” has been bastardised to mean “higher the PE, the better”.
There are gurus claiming “PE has zero informational value”.
People are giving examples of where Amazon or BestBuy or Asian Paints & other such companies were trading in 90s.
1/
There are gurus claiming “PE has zero informational value”.
People are giving examples of where Amazon or BestBuy or Asian Paints & other such companies were trading in 90s.
1/
A company could have a very high PE if it’s growing fast and reinvesting at a high rate. Acquisitions, depreciation or just lower operating leverage due to smaller scale - all play a role.
What you are trying to estimate is potential cash generation ability of a business.
2/
What you are trying to estimate is potential cash generation ability of a business.
2/
Amazon PE was high because it “chose” not to report profits, save taxes & reinvest the same. So PE was not the right parameter to value it on.
A startup could be in losses for years and hence PE is not relevant.
A disruptive technology could have extremely high growth.
3/
A startup could be in losses for years and hence PE is not relevant.
A disruptive technology could have extremely high growth.
3/
You can’t use the example of one of such businesses to come to a conclusion that the PE of a mature stable business is not relevant.
This is what is being preached by lot of FMs.
4/
This is what is being preached by lot of FMs.
4/
A high PE ratio might not mean the stock doesn’t have value but a high P/Sales ratio is often a good red flag.
You also have to look at cash conversions. No formulas here. You have to assess the business and the price from various angles.
5/
You also have to look at cash conversions. No formulas here. You have to assess the business and the price from various angles.
5/
You have to be more careful while paying higher multiples. The base rates are against you.
Buffett in 1996 AGM referred to Gillette/Coca Cola as “inevitables”.
Fan of the big man but IMHO there are NO “inevitables”.
6/
Buffett in 1996 AGM referred to Gillette/Coca Cola as “inevitables”.
Fan of the big man but IMHO there are NO “inevitables”.
6/
GE, GM, IBM, Xerox, Kodak — they all seemed like inevitables. Now it’s FAANGs.
There are many businesses that will never be cheap enough. But there is no business, none, zero that can never be over priced.
7/
There are many businesses that will never be cheap enough. But there is no business, none, zero that can never be over priced.
7/
Closer home in India how much can be the growth in paints? What multiple of GDP? How much of unorganised is left to take share from? How much can you expand margin. The supercomputer and the WC efficiency gets priced in. You need incremental improvement for excess return.
8/
8/
At a time when the churn of stocks in the Indexes is at its highest so is the longetivity of the growth being priced in for loved stocks (good management/BS and essential products).
For these stocks the PE IS telling a story, there IS a lot of information in that number.
9/
For these stocks the PE IS telling a story, there IS a lot of information in that number.
9/
Am curious if Buffett is selling Apple and not repeating the 98’s mistake of Coca Cola. Although that’s not how he has operated historically.
But if he could change enough to buy Tech may be he has changed his exit strategy as well.
10/10
But if he could change enough to buy Tech may be he has changed his exit strategy as well.
10/10
