Thursday, August 24, 2017

What they tell you versus what they don't

This post have been inspired by a recent conundrum which has intrigued many investors. Often people find it difficult to navigate the cycles of stock market and in lack of experience fall prey to following prices.
The individual investor in stock markets will often find people advocating purchase of "lower priced companies".  They wouldn't also be wrong as undervaluation is a big source of long term out performance.
However the idea of purchasing companies with a passionate and ethical management, running a business with a long runway of growth has always intrigued me. I have always seen companies like HDFC Bank, Page Industries, ITC etc delivering returns year after year and what surprises me is that the valuations have always looked expensive.
Thus I thought to study a few of these companies and see whether "undervaluation", which we want while purchasing common stocks have persisted in these companies or not. The first company which I have used while doing this is HDFC Bank. I went through data, annual reports and prices for HDFC Bank since 1996. Below I present you the facts for the bank

Over the last 21 years of its trading history,

Median year end Price to Earnings ratio (1996-2017): 24
Median year end Price to Book ratio (1996-2017): 4.1

I tried to work further with the data to find out if investors could have taken the opportunity of mid year volatility to get better prices. Below are the findings

Median Lowest Price to Earnings ratio from (1996-2017): 16.8
Median Highest Price to Earnings ratio from (1996-2017): 27.5

The lowest valuations experienced by HDFC Bank was in the year 2000 when the mid year Price to Earnings ratio fell to 9.8 times.

Now, I would presume only people who were lucky enough to have insights into business evaluation and also the stomach to buy when price are low could have been able to buy in the year 2000 when valuations were cheap. However, that would have only been a small minority as mere mortals we can hope to make more use of averages than extremes.

For the sake of studying I also wanted to see what If someone bought at the most extreme valuations. How would they have fared? Below I present the facts:

Highest Price to Book ratio (Year 2000): 8.1 times
Stock price as on 31st march 2000: Rs 51.44
Stock prices as on 31st march 2017:  Rs 1442.55

Annual Return over 17 years: 22%

Not bad eh. Even when you would have bought the company at the times when valuations were at historic highs, the returns would have been decent.

The idea of the post is to check whether its always better to look for undervaluation or that every case should be evaluated separately.
In the case of HDFC Bank, even if one would have bought at the extremes they would have generated handsome return. Simultaneously the idea is to look at multiple companies and check whether this idea persists in other companies as well. I would be continuing this practice and would post my findings for the other companies as well.

I have attached the excel sheet if one wants to look at the data. The data prior to 2012 has been adjusted for splits.


  1. You have put across an important point in the easiest of methods to explain. Great work. Worth noting that for the person who bought at the most expensive valuation did not see any meaningful return for the next 3 years. However, patience and conviction are rewarded in good businesses.

  2. Can you please also advise if you have taken any particular date in years for the share price? or is it random any date price of that respective year?

  3. Hi, the data is as per year ending 31st March for all the years

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