Stock market basic tip. All stocks that goes down will not be coming back and vise versa.
I just saw someone ask a question,
How do people lose money in the stock market? If i buy stocks today, and after some days the value of stocks go low, then I can wait for some more time me until stocks go up. What is the thing that make people lose money ?
Stock market is not a water tank. Where level of water goes up and down when the pump is on and while the water is used respectively.
It is a demand for a portion of the business a company does.
The value of the stock (PE, price to earnings per share) is fixed based on numbers like BV (Book Value), Profitability Ratio (like Margins, Return on Capital Employed), Debt to Equity ratio, etc and also has factors like the industrial outlook in the future, the pricing power, etc
The above arbitary PE multiplied by the EPS is the value of the stock. EPS is derived from the quarterly results (profits/equity capital).
Let’s give an example:
Industrial P/E = 25.
EPS in the year 2014: 0.09.
Fair value in 2014= 25×0.09 = 2.25
EPS in the year 2015: 0.33
Fair Value in 2015= 25×0.33= 8.25
EPS in the year 2016: 1.01
Fair Value in 2016= 25×1.01= 25
EPS in the year: 2017: 2.1
Fair Value in 2017= 25×2.1= 50
Do you think when you buy the stock in 2014 at 2.25, you can sell it now at 50 and buy back when it goes to 2.25? No, the stock will never go back to even 25.
Going through quarterly results,
EPS for Q4= 0.91
If the company maintains 0.91 in all four Quarters. The EPS becomes 3.6.
Then the fair value of the stock in one year is 3.6 x 25 = 90.
I had recommended to buy Bhansali Engg on June 5th.
Target was hit in 4 days.
Sometime such good companies create a demand in the stock. The fair value in the future can be attained in short term. If the stock reaches the value of 90 in 3 months, the PE Ratio spikes to 45 from 25, then profits can be booked and bought once PE Ratio corrects to 30 and 25. We know the PE Ratio will drop due to good results, still it is the gamble that people take in the large capital stocks.
If the earnings are not as per expected the stock will dip. If the stock is not performing for life or if it is performing for life we ‘re never going to see the stock prices again.
Penny stocks are not going back to 100s, Penny stocks that have gone to 100s are not going to come back.
Every quarterly result is important. Most of the stocks will never see a new 52 week low and some will never see a new 52 week high again in life.
Your statement is true for stocks where the EPS increase or decrease marginally year to year. There is only fluctuations in PE Ratio.
However, Performance matters.
If you like this article, share it to your friends to spread awareness.