Home Business Will stocks like IEX, IRCTC and Dr Lal Pathlabs ever recover?

Will stocks like IEX, IRCTC and Dr Lal Pathlabs ever recover?

When will the stocks of IEX, IRCTC and Dr Lal Pathlabs recover?

I was worried about the steady rise in the share price of IRCTC a year ago. so i did video on stock,

I had only a basic understanding of the company’s business at that time. But its evaluation left me stunned. Based on its ordinary earnings, the stock was commanding a huge PE ratio of around 100x.

I don’t think there are many stocks which you buy at 100x PE and make good money in next 3-5 years.

However, my and other like-minded investors’ opinions kept falling on deaf ears. The stock kept going up. Within weeks of my video, the stock was up another 44%.

I expect that investors who ignored the valuation and continued to buy it were able to sell at the top. If they haven’t, they have missed a golden opportunity in my opinion. The stock is down more than 40% from its 52-week high and doesn’t look like it will scale again anytime soon.

IRCTC is not the only stock that has faced this fate. some other investor preferred or so called multibagger stock Like IEX (Indian Energy Exchange) Ltd and Dr Lal Pathlabs, now find themselves in a similar situation.

Both saw their stock prices being driven to multi-year highs with little or no relation to valuations. Both have been taken to sweepers in the last one year or so.

In fact, in the case of iex share price, the decline has been more than 50%. Any investor who has made the mistake of investing over the top is surely staring at a deep chasm.

If you’re wondering how this came to be, well, a great deal of blame must be placed at the door of human greed. When the lure of quick bucks blows your mind, no PE is enough. Your brain keeps coming up with new reasons to take the PE higher.

I think Ben Graham puts it quite well in his brilliant book, security analysis,

Here’s what he saw…

  • The notion that the desirability of a common stock was completely independent of its price seems incredibly absurd. Yet the New Age theory directly led to this thesis.

    If a stock was selling at 35 times its maximum recorded earnings instead of 10 times its average earnings, which was the pre-boom standard, the conclusion to be drawn was not that the stock was overvalued now, but only that The price level was elevated.

    Instead of estimating market value based on established standards of value, the New Age based its standards of value on market value.

Well, here’s the gist of what Graham is trying to say.

Greedy Mr. Market is a brilliant salesman. If you have no idea how much you are willing to pay for a company, Mr Markets will convince you to buy the stock at any PE multiple.

He will keep crafting these amazing stories and assures you that what you are paying for is not too much.

Therefore, an easy way out of this trap is to set an upper limit yourself. Decide what is the maximum PE you want to pay for the stock and stick to it. It doesn’t matter how good the fundamentals are or how promising the growth of the underlying business is.

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My experience and the way the Indian stock market has worked historically tells me that this upper limit should not exceed 25-30x for Indian stocks. If you consistently pay more than 30x in the name of quality or high growth, I don’t think you will outperform the market in the long term.

Of course, it’s a different matter if you think you are highly skilled and can find out in advance whether certain stocks are even worth buying at a PE of 50-60x.

But please note that there is a very thin line between confidence and overconfidence. It is always better to be conservative when it comes to valuation matters.

I am sure that investors who bought Dr Lal Pathlabs or IEX Ltd a year ago would have done their homework and considered themselves an expert in these companies.

However, even the most in-depth analysis may not prepare you for the kind of disruptions that these businesses are facing right now.

Both are considered to be market leaders in their respective fields and now they can see the intensity of competition very high. This puts a big question mark on their future profitability.

And that’s the risk of paying a very high PE multiplier for any given stock. As the stock already has a very high expected price, investors panic at a small upset and start dumping the stock.

Therefore, because of these downside risks, it is always better to be conservative and include a substantial margin of safety in the multiplier that you are willing to pay.

Now, to answer the question we asked in the title, ‘When will these stocks recover?’The key is in minimizing your risk and not trying to maximize your profits.

First, you have to decide whether you want to pay the maximum PE multiplier for these shares. And you better be conservative here.

Second, if you bought these shares near their all-time highs, you could probably average out at or below the fixed PE multiple for these stocks. While doing this, keep in mind that you do not make a single stock more than 5-6% of your entire portfolio.

Now, all you have to do is sit back and track down their fundamentals. If they improve, the price will also go up, hope you make a good profit. If they don’t, you may have to exit these stocks by taking a shot.

The good thing here is that you now have a proper investment structure. It is a framework that limits your losses if you are wrong and gives you a decent profit if you are right.

Without a proper framework and without any consideration of the maximum multiplier you will be paid for a stock, you will lose out and could even make huge, irreversible losses.

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from equitymaster.com,

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)

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