22 Comments
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Hansmukh Jain's avatar

Excellent Write up as always with so much clarity. Please write next blog on Importance of Psychology and Investor Behavior to succeed in market.

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Alexander Fernandez's avatar

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.

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Amit's avatar

Beautiful write up to give prospective of PE . Could you please cover portfolio construction approach if possible

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Mayank K's avatar

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?

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Prabhakar Kudva's avatar

Even if you check their pe before the run it will still be considered expensive.

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Uday's avatar

Nice one, couldn't agree more.

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Kishor Dhas's avatar

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.

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Prabhakar Kudva's avatar

Yes key point is P/E ratio in an absolute sense has no predictive value.

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Chetan's avatar

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

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Prabhakar Kudva's avatar

No dividend yield is just a derivative of price so it has no impact. Typically high dividend yield stocks will have a lower pe.

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BIPUL BARMAN's avatar

Thanks a lot for sharing. Good observation.

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Ketan Kumar's avatar

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.

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Mohit mendiratta's avatar

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

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Prabhakar Kudva's avatar

that comes under popularity.

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Nagarjuna Reddy's avatar

You write here what I think about PE ,valution based on pe is over rated

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Raunak T's avatar

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.

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Prabhakar Kudva's avatar

Yes exactly point being made - PE in isolation is not signal but just noise.

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Accounts RTOPL's avatar

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 ?

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Prabhakar Kudva's avatar

It’s a custom column. Price / latest eps *4

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Ketan Kumar's avatar

Hi Sir,

What's the logic behind this formula

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Prabhakar Kudva's avatar

It’s a short hand for forward pe. May not apply in all cases especially seasonal businesses. It’s an approximation

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Prabhakar Kudva's avatar

There are other factors too right.

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