Valuations - #5 Multibagger Magic Mantra



You should never buy every single great stock!!!

Yes, you heard it right!
Don't ever buy a company's only because it is a great business!
Just like you shouldn’t buy the next best phone from Apple or Google if it costs a Million.
Even if you can afford to buy, you would be a fool to buy at that price!

Luckily, every day stock prices vary and you just have to wait for the right price which you think is right and then hit “BUY”!

Price is something everyone knows, but what is it really worth?

There is a magic trick to find just that!


In fact, all-time-greatest investor Warren Buffett first looks at the business, comes up with a price in his mind and then looks at today's market price of that stock!


Sounds crazy, but the technique is very simple and anyone can apply it.

Guess the price of Non-Banking Stocks:

  1. Compute the sum of last 4 quarter's consolidated EPS
  2. Multiply with a P/E multiple which you think is appropriate based on the business and the industry segment it is in.
  3. Result is the ideal price of the stock!


Example:

If company A has consolidated EPS of last 4 quarters combined as 10 and if i feel that the company is a great business with amazing management and worth 30 P/E multiple then ideal stock price would be: 10 * 30 = 300



Guess the price of Banking Stocks:

  1. Check out the book value of the company
  2. Multiply with a P/B multiple which you think is appropriate based on the business and the industry segment it is in.
  3. Result is the ideal price of the stock!


Example:

If Bank A has Book Value of 100 and if i feel that the company is a great business with amazing management and worth 5 P/B multiple then ideal stock price would be: 100 * 5 = 500


Tricky Part:

Identifying the appropriate P/E or P/B multiple is the tricky part, it takes experience to get it right.
Generally, Warren Buffett looks at four aspects of the company to decide P/B :
  1. Growth Story (link)
  2. Shareholding Patterns (link)
  3. Debts (link)
  4. Return on Equity (link)

Note:

Sometimes different websites show different P/E ratios for same stocks.
It is better to learn how to calculate P/E on your own from the quarterly/annual report from the company’s website.





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