The tips are right in one sense but there are lots of caveats which render these tips dangerous for a starter. Ill list down just a few of these
Low P/E strategy 1. One must be extremely careful of the industry context while using this staretgy. For example steel is a cyclical industry, at the peak of the cycle, the P/E multiples would be extremely low and you might think its a good pick, but it might not be true. Hence Low P/E does not always work, especially in cyclical Industries. 2. The P/E based on just finished Fiscal year is incorrect, because the market will value future and not past. example if a company has had a bad year due to some one time expense its P/E will be very high. This does not mean its not a good stock. The market will calculate P/E based on expected EPS and then judge if its worth valuing.
On Growth 1. The underlying factor for buying a stock is weather it is going to create "Value" or not. There are three drivers for it; Profitability, growth and cost of capital.if a companies profitability is lower than its cost of capital it is destroying value. And if it grows it destroys faster. learning: Growth is good only with profitablity
RE:Caveats in each of these tips- Be careful
by sanjay arunkumar on Aug 21, 2005 03:06 AM Permalink
gupta has rightly put up some caveats, nevertheless the original writeup is quite balanced. financial world is so complex that one set of consideration may not bring desired results always, but for a 'new comer' these tips are of great value.
