Beware of high PE stocks! Most of them may not have fallen enough
updated on 29 Dec 2016
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Many of the high PE stocks that had been seeing re-ratings over past seven-eight years might just disappoint you now. Re-ratings have stopped and some analysts say it might be better to hunt value elsewhere.

The recent rally in commodity prices and the government's cash ban have been major setbacks for the so-called 'growth' stocks, which enjoy high PE multiples on account of their above-average earnings growth relative to the broader market.
Many of these stocks are from the consumer sectors, which generally have stable earnings outlook.

But as earnings recovery gets delayed for India Inc, especially on the consumer side, analysts are advising investors to become wary of high PE stocks despite the recent correction.

PE ratio is used to gauge valuation for a set of companies within a sector. But with the consumer sectors not expected to perform well fundamentally, analysts say investors should either wait for more correction or look elsewhere.
In the BSE500 category, there are 121 stocks, whose trailing 12-month EPS stand above 40. Most of them belong to the FMCG, pharma, cement, entertainment and IT sectors.

Cigarette stock Godfrey Phillips enjoyed a PE of 52 on November 8, the day Prime Minister Narendra Modi announced demonetisation. The stock has slumped 34 per cent since then and the stock now trades at 44 times.

JK Lakshmi Cement has plunged 28 per cent since the cash ban move and its PE multiple has dropped to 40 from 56 last month. FMCG firm Manpasand Beverages, paints maker Berger Paints and retailer Shoppers Stop have seen their share prices fall 21-22 per cent since November 8. During this period, their PE multiples have dropped from 58-97 levels to 46-78 levels.

Multiplex stock PVR has seen its PE drop to 50 from 59 on November 8, with the stock taking a 15 per cent knock. Jubilant Foodworks has dropped 14 per cent and its PE has contracted to 55 from 67.

Some of the high PE stocks have corrected 10-20 per cent in the past 2-3 weeks, led by the twin impact of higher yields in developed markets and demonetisation back home.

Of the 121 BSE500 stocks with PE ratios above 40, as many as 99 have fallen up to 35 per cent, while 42 others have plunged in lower double digits.