Can a stock be valued cheaply than a bond? Or for that matter a
Government bond? Looks unlikely, isn't it? After all, a good quality
stock will continue to raise its earnings for many years into the
future. But a bond has no such possibility. Its coupon payments will
remain as similar five years down the line as they are today.
Thus, it goes without saying that stocks will continue to trade at lower yields than Govt bonds or in other words, will command a higher P/E.
However, as we all know, markets don't operate with robotic precision. A lot of times, stocks, even good quality ones, start to trade at prices that make them more attractive than Government bonds.
Clearly, what better opportunity for a value investor to fish in a sea of such stocks? Not only are these stocks good quality but they also have a margin of safety in the sense that they are available at lower or at par valuations of Government bonds.
In our view, stocks that are currently available at a P/E of 10 or less are the kind of stocks that could qualify for the criterion mentioned above. Why a P/E of 10? Well, a small Google search will tell us that a 10-year Indian Government bond currently trades at a yield of around 9%.
Thus, a stock with a P/E of 10 or less is the one that is trading lower than the bond. Besides, it is also important that the stock be of good quality i.e. have a D/E ratio of no more than 0.5 times so that the chances of the same going bankrupt or the stock turning into a value trap is minimized to the best extent possible.Check Debt Equity Ratio a Caution.
Catch The stocks in the Jan2012 list .review my picks you will find one of them as an multibagger.
Not to surprise it is GNFC a stock now ready for smart gains .Current Price is Rs.82/= charts says buy above Rs.84 as on date. Buy for Smart Returns you will not see the stock again below Rs.80/= over the next five years.
Thus, it goes without saying that stocks will continue to trade at lower yields than Govt bonds or in other words, will command a higher P/E.
However, as we all know, markets don't operate with robotic precision. A lot of times, stocks, even good quality ones, start to trade at prices that make them more attractive than Government bonds.
Clearly, what better opportunity for a value investor to fish in a sea of such stocks? Not only are these stocks good quality but they also have a margin of safety in the sense that they are available at lower or at par valuations of Government bonds.
In our view, stocks that are currently available at a P/E of 10 or less are the kind of stocks that could qualify for the criterion mentioned above. Why a P/E of 10? Well, a small Google search will tell us that a 10-year Indian Government bond currently trades at a yield of around 9%.
Thus, a stock with a P/E of 10 or less is the one that is trading lower than the bond. Besides, it is also important that the stock be of good quality i.e. have a D/E ratio of no more than 0.5 times so that the chances of the same going bankrupt or the stock turning into a value trap is minimized to the best extent possible.Check Debt Equity Ratio a Caution.
Catch The stocks in the Jan2012 list .review my picks you will find one of them as an multibagger.
Not to surprise it is GNFC a stock now ready for smart gains .Current Price is Rs.82/= charts says buy above Rs.84 as on date. Buy for Smart Returns you will not see the stock again below Rs.80/= over the next five years.
