Monday, February 28, 2011
The approximated linear fit for the P/E ratio has been drawn on the P/E graph. The linear equation for the above drawn line is:
Y=A+BX, Err(A)=127, Err(B)=5.2E-5
Y= -1850+0.000762 X
A positive sloping Linear fit for P/E translate into a rising P/E of Nifty over the year. The slope translate into increase in P/E to a vale of (0.000762 x 365 = 0.278) per year.
P75 (75 percentile ) of 21.06 of P/E means 25% of time nifty-P/E ratio is above 21.06 and with average value of P/E at 18.3 it is good to go for value investing at 18-20 level or below (with current value ~20.3 can be said a good entry level)
Other important point to be taken from the chart is converging and diverging charts of P/B and Div. Yield of Nifty. A converging charts (at bottom) leads to fall in P/E value which generally leads to fall in Nifty and opposite happens when charts diverge.
As of now (25 Feb 2011) the P/E value approximately is touching the linear fit line. so Below this line buying can be said as value investing.
P/E is a lagging indicator. The denominator is earning-per-share of last audited result.Most quarterly result comes unaudited so generally annual result is taken that's why its value changes over a period of time. Its historical value can be used to make an informed and on time decision about entry and exit for long term investing in stock market.