One parameter that investors always look when buying shares is the price to earnings ratio. This is the most simplest way to tell whether a stock is cheap or not, though there are many other parameters that one must also consider.
How is p/e ratio derived?
Before we tell you which stocks to buy based on p/e, let us see which are the cheapest stocks to buy in terms of p/e.
P/E ratio is divided by getting the EPS and dividing it by the current market price. For example, if a stock has a Earnings Per Share (EPS) of Rs 20 and the share price is Rs 200, we say that the p/e of the stock is 10. The EPS is got by dividing the net profit of a company by the number of shares. Generally, we do not look at p/e in isolation, but would look at various other factors like dividend yield, book value, future earnings potential for a stock etc. Now, let us take a look at some stocks that are cheap in terms of p/e and whether they could be good bets for the long term. We have chosen stocks that are low on p/e, great on dividend and have stable businesses.
Chennai Petroleum is a stock that has had a very good year for 2016-17 and we expect the same trend to continue. Now, consider this: Chennai Petroleum reported an EPS of Rs 70.57 for 2016-17 and based on the same, at the current market price the stock is trading at a p/e of just about 5.5 times. This is one of the best low p/e stocks to buy for a number of reasons. Chennai Petroleum is a company that is into crude oil refining. As long as crude oil prices remain subdued there is a complete scope for the stock price to rally. The company has also declared a superlative dividend of Rs 21 per share. This gives you a yield of 5.5 per cent tax free dividend yield on a price the current share price of Rs 389. However, as we indicated earlier, much would depend on crude prices going forward.
Sasken Technologies like Chennai Petroleum is available at a very low p/e. The stock is just available at around 12 times P/E. The company reported a full year EPS of Rs 42 and the stock trades at around the Rs 536 levels. The company also recently declared a dividend of Rs 4.5 per share. Sasken Technologies is a company that is into product engineering and digital transformation providing concept-to-market, chip-to-cognition R&D services to global leaders in Semiconductor, Automotive, Industrials, Smart Devices & Wearables, Enterprise Grade Devices, Satcom, and Retail industries. At the moment the stock is cheap in terms of p/e though as mentioned earlier, we should always keep other factors in mind like growth potential, price to book etc.
Great Eastern Shipping
The Great Eastern Shipping is one stock that has remained cheap on p/e basis. In fact, this has always been the case with this stock for some reason, which we find difficult to understand. The company is India's largest private sector shipping company. GE Shipping as it is popularly known reported an EPS of Rs 40 for FY 2017-18. Based on a current market price of Rs 400, the stock is available at a p/e of just 10 times, which is not bad. Again the dividend yield is around 3 per cent making the stock an attractive pick at the current levels. Buy the stock for long term gains.
This is a diamond Jewellery manufacturing company that has been in the profession for almost two decades now. The company is a complete OEM manufacturer that largely uses CAD and CAM for the manufacture of diamond jewellery. Again, like those companies mentioned above the stock is trading at a price to earnings ratio of around 7 times, which is relatively cheap. The price to book is also around 0.66 times which is reasonable. However, it must be remembered that the stock has a tendency to be volatile due to the nature of business. Recently, the company reported an EPS of Rs 11.07 for FY 2017-18, taking the p/e to around 7 times at the current market price of Rs 80.
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