When buying STOCKS - What to look for? -- HIGH P/E ratios or lows.?

Question

WHAT are the ratios we h've to look for buying good stocks- LONG TERM-1-2 years -&- SHORT term -- 3 to 8 months. HIGH P/E RATIOS or LOW P/E RATIOS. any other criteria to look for?

Answer 1

In my opinion, there are five rules to investing.

1. Invest in learning

Before you invest in stocks, get your hands on some good reading material. Read the financial dailies and magazines. Surf the Internet and watch CNBC channel.

I spend at least four to five hours daily just reading, listening to the news, reading e-mails and research reports from various brokers. But, hey, that is my job!

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2. Look behind the scenes

Look behind what is apparent. It is like looking at a James Bond movie and thinking the hero leads the show, ignoring the doubles, stuntmen, and the entire production and camera crew that go into this movie.

When the talk is about a real estate boom or a retail boom, with malls and department stores sprouting all over the country, look behind the scenes. This will definitely impact the ceramics industry, sanitary suppliers and the glass industry, to name a few. Look for companies in these areas.

Similarly, when talking about textile and auto part exports, look at ports, shipping companies, packaging companies and logistics companies.

When the buzz is about medicines, think about the companies that prepare capsules, like Bharti, Natural Caps and, now, India Gelatin, who makes the gelatin required for the capsules.

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3. Dividend is the key

If a company pays dividend regularly, it is a sign that it has a good balance sheet. Look for such finds, and check the dividend history over the last five years. Of these, pick the ones that have a higher dividend yield as compared to a one or two-year bank fixed deposit.

Buy them and hold on to them. Remember, every dog has its day. Soon, this company will be noticed.

When I bought Bhartiya International for a little over Rs 20 in 2001, it was giving a dividend yield of 6% to 8%. Now, I can safely take a 300% appreciation if I sell the shares.

Ditto in the case of other companies like Rasoi, Srinivasa Hatcheries, Garware Wall, Cosmo Films, Nilkamal and Raj Plastics.

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4. Welcome trouble

No one wants to invest in 'trouble' companies. But, sometimes, they make for great opportunities.

The key is to locate the source of the problem. And then judge whether it is a one-time occurence or, possibly, a lifetime one.

For instance, not getting gas for production is not a lifetime trouble for Regency Ceramics. It can be resolved quickly, enabling the company to bounce back.

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5. Invest in Penny Stocks

If you like to play penny stocks, don't invest blindly. These are stocks that are really cheap, but risky, too.

Be selective. Look at the sector as a whole and see by how much the price of the leading stocks have moved. Now look for penny stocks in that sector which are yet to climb upward.

But, again, follow some rules. The companies must have good earnings (revenue).

Find out why they are still not the market favourites. Do they have low profit margins? Are their profits being cut because they are paying back loans at a high interest rate? Do they have a lot of loans to service?

Over time, the profit margins will increase if there is a price hike. Or once their debt is cleared, their profits will shoot up.

Take, for instance, steel and cement stocks.

I bought Jindal Vijaynagar & Steel (now Jindal Steels) on September 12, 2001, which was available at around Rs 2.50 and Rs 3.50. I sold at the start of 2005 for a little more than Rs 15.

On the same day, Mangalam Cement was available in the Rs 3.50 to Rs 5.50 range, and is now around Rs 75.

I picked up JCT (textile stock) in 2002 for around Rs 3 and the stock is currently trading at around Rs 15.

These three stocks are classic examples of well managed companies incurring losses due to high interest charges and low profit margins.

Once these sectors bounced back, they began to reduce their debt by refinancing at lower interest rates.

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What do you do now?

I am personally convinced that it is too late in this bull market to really reap gains.

Don't get swayed by predictions that the market can go much higher from here to 7500+. That is being greedy.

Following Sir John Templeton's golden rule, I am currently not buying but selling my stocks. After all, to make a profit, you have to sell.

And, with the money I earn, I am parking it in fixed return investments. When the market crashes, I shall wait for the opportunity to pick up all those goodies again.

Remember, patience is the key.

Answer 2

A high P/E ratio suggests that the company is expecting high growth in revenue. In a short period - six months, the company will deliver two earnings reports (in US) - any hint that growth is slowing will result in a dip in the stock price.
A low P/E ratio suggests a low growth or no growth company with steady earnings or a company predicted to have lower earnings compared to the previous time period ( housing stocks). The effect of earnings on the price would be lower because less is expected.

Most people would look at the PEG ratio - that is P/E divided by the growth rate of the company. So, a stock with a P/E ratio of 25 growing at 25% has a PEG of 1. A lower PEG is good. It measure how much the investor is prepared to pay for the growth expected. If a company can increase its total sales revenue, then with the same profit margin, earnings should grow as fast as sales. I expect most stocks currently have a PEG greater than 1.

Answer 3

When it comes to buying stocks, the P/E is actually meaningless. For speculators, it's the fluctuation of the stock price that counts, the hell with the P/E ratio. Before anything happen, the speculator might have pocketed the money and long gone. For holders, it's the potential growth of the company, not it's P/E. RIM is a very typical example, it was a $150+ stock, it's P/E was high but people kept buying. Today, it's a $13 low P/E stock, people dumped it like yesterday's garbage.

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Answer 4

The P/E ratios you look for are sector-specific. Take tech stocks for example: it's not uncommon for a stock to have a 30/1 ratio and still be smoking hot. Common sense would say that the lower the P/E compared to other stocks in its sector, the better the bargain. If a company has similar earnings to its close competitors, but a lower price, it defies logic. There may be another reason the price has dropped . Or it may simply be a bargain!

Answer 5

When buying stocks I look for the outlook for the company and the industry. This is for long term investments. In the short term you can look to take overs, weather and important news announcements as these are what usually move a stock price in the short term.

Answer 6

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Answer 7

buying stocks high ratios lows

Answer 8

You need to find P/E ratio which are not more than 1.5 times the companies growth rate. Its a good starting point. But then again our traders dont really care about P/E's. If you like you can check out our website www.rematatrading.com which talks about our trading platforms for professional traders.

Answer 9

make investment for long term and find the share with low P/E ratio. Go for future prospectus of the company and not for the present P/E ratio.

Answer 10

P/E ratios should be low.
The other ratios which you need to look out are:
Debt Ratio <=1
EPS, Book value.

If you are new investor, stick to Large cap shares of Auto, Software & Bank sectors. Don't risk with other sectors. Good LucK.