Completely agree that PE is more of a diagnostic signal than a definitive valuation tool. The part about high PE names often outperforming really resonated—so many investors miss multi-baggers because they anchor on a "reasonable" PE without asking why it's high in the first place.
Sir, Thank you for great elaboration on PE the most misunderstood ratio. However just for discussion, as we are looking at past 3/6/12 months performers- doesn’t it mean that their PE was not as high as it is now- because PE expanded during last 3/6months. This also supports the argument that- big returns come from PE expansion +Growth. So companies at lower valuation, having high prospects of growth is really what one should keep looking for, as rightly you described it as goldilocks zone. Although such opportunities are rare.
The key to smart investing is tracking forward guidance from management, not just past performance. If forward P/E is much lower than current P/E, the stock might be undervalued today. Use this gap to take a calculated risk based on future earnings potential.
Reassess every quarter by updating EPS estimates and comparing with actual results. Stay flexible — increase, hold, or exit based on whether the forward story is playing out.
Excellent Write up as always with so much clarity. Please write next blog on Importance of Psychology and Investor Behavior to succeed in market.
Completely agree that PE is more of a diagnostic signal than a definitive valuation tool. The part about high PE names often outperforming really resonated—so many investors miss multi-baggers because they anchor on a "reasonable" PE without asking why it's high in the first place.
Beautiful write up to give prospective of PE . Could you please cover portfolio construction approach if possible
Hi Prabhakar, thanks for this excellent write up.
I have a question on the last part:
- Doesn’t the data shown means that stocks become high PE once they have given high returns and not high PE stocks give best returns?
Even if you check their pe before the run it will still be considered expensive.
Nice one, couldn't agree more.
Sir, Thank you for great elaboration on PE the most misunderstood ratio. However just for discussion, as we are looking at past 3/6/12 months performers- doesn’t it mean that their PE was not as high as it is now- because PE expanded during last 3/6months. This also supports the argument that- big returns come from PE expansion +Growth. So companies at lower valuation, having high prospects of growth is really what one should keep looking for, as rightly you described it as goldilocks zone. Although such opportunities are rare.
Yes key point is P/E ratio in an absolute sense has no predictive value.
Namaskara sir
Thanks alot for sharing your valuable insights . Kind of summarizes many of things on PE ratio.
Just a question : Do u believe that Div Yeild has any impact of PE ratio ?
Would love to hear your take on this. Thanks alot
No dividend yield is just a derivative of price so it has no impact. Typically high dividend yield stocks will have a lower pe.
Thanks a lot for sharing. Good observation.
The key to smart investing is tracking forward guidance from management, not just past performance. If forward P/E is much lower than current P/E, the stock might be undervalued today. Use this gap to take a calculated risk based on future earnings potential.
Reassess every quarter by updating EPS estimates and comparing with actual results. Stay flexible — increase, hold, or exit based on whether the forward story is playing out.
P/E ratio also depends upon the superstar shareholder like sageone, malabar india, mukul agarwal etc
Entry of them in smaller company can surely change the perception of company and perception is P/E
that comes under popularity.
You write here what I think about PE ,valution based on pe is over rated
Reverse would be also true? Some of the most corrected or highly infamous fall would be high P/E stocks.
Paytm and so many others recently, Real estate in 2007-08, NBFCs during their heydays.
Their 3 months return would have been great too.
Yes exactly point being made - PE in isolation is not signal but just noise.
Hi Prabhakar,
Nice and logical read.
Two questions :
1) how is fwd pe showing on your screener ? There is no such tab when i search.
2) basically the logic is high pe is high pe for a reason. But asian paints , relaxo , how will avoid ? Its high pe and low growth maybe ?
It’s a custom column. Price / latest eps *4
Hi Sir,
What's the logic behind this formula
It’s a short hand for forward pe. May not apply in all cases especially seasonal businesses. It’s an approximation
There are other factors too right.