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.
In 2017-18, the company has already reported an EPS of Rs 50 in the first three quarters. If we add another Rs 15 to the fourth quarter the EPS should be Rs 65 at the very least. At a price of Rs 375, the stock is trading at a p/e of just about 5 times.
This is one of the best low p/e stocks to buy for a number of other 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 375.
However, as we indicated earlier, much would depend on crude prices going forward.
This is a fast growing private sector bank, which is seeing a rapid growth in its business turnover.
The company has been reporting good numbers for the past several quarters. Interestingly, the business turnover for the bank touched Rs 1,02,182 crores as on Dec 31, 2017.
The bank has now crossed 9.4 million customers with a branch network of 781. Karnataka Bank reported a good financial performance for the three month period ending Dec 31, 2017. Net profits rallied to Rs 87.38 crores from 68.52 crores in the corresponding period of last year.
The gross NPA fell from 4.30 as a per centage of loans in the Dec 2016 quarter to 3.97 per cent in the quarter ending Dec 31, 2017.
It is possible that the bank is on track to do an EPS of Rs 18 for 2018-19. If you apply a simple p/e of 10 times, the stock should trade at Rs 216 at the very least. The stock is a low p/e stock and one of the cheapest private sector banks. It trades below book value and gives a decent dividend yield of 4 per cent.
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 likely to report an EPS of Rs 40 for FY 2018-19.
Based on a current market price of Rs 400, the stock is available at a p/e of below 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. The stock is also trading at a price to book of just 0.83 times.
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 7 for the first three quarters so far in 2017-18. If it does an EPS of Rs 10 for 2017-18, the p/e should be around 8 times at the current market price of Rs 80.
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