Purchase stock for long term using "Nifty P/E ratio"

Monday, February 28, 2011

Statistical Features:


S.Quantity
P/E
P/B
Div.Y
Max
28.47
6.55
3.18
Min
10.68
1.92
0.59
SD
3.8
0.98
0.5
P95
24.92
5.42
2.48
P75
21.06
4.34
1.8
P25
14.89
292
1.09
Mean
18.3
3.7
1.485

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.

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