What should you do with high PE stocks in your portfolio?

Nifty had recently slipped below 18,850. But, the recovery from the lower level has also been very fast. Nifty has registered a rise of nearly 600 points from the low of October 26, 2023. And from the low of 16,913.75 formed on March 28, Nifty has jumped by almost 2,500 points. In such a situation, should one be cautious about shares of select companies? If yes, then should one be more cautious about stocks with high PE multiple?. And if someone has such shares in his portfolio, what should he do?

PE multiple is price to earnings multiple, which we also know as PE ratio. PE multiple tells us how many times the share or index of a company is trading in the stock market compared to its EPS i.e. earnings per share.

We can also understand it this way that how many times more the price are we willing to pay to buy the shares of a company earning a fixed profit per share. For example, if the EPS of a company is Rs 10 and the share price is Rs 100 then people buying the shares of that company are paying a PE multiple of 10 times. This is because the PE multiple of 29 out of 50 stocks of Nifty is more than the index. Of these, the PE multiple of the top 9 companies is more than 55 times and 2 companies, Apollo Hospitals and Adani Enterprises, are trading at a multiple of more than 100 times.

But after the second quarter results, foreign brokerage house Morgan Stanley maintained overweight rating and increased the target to Rs 6,101 while the stock is trading around Rs 5,150.

Not only this even after the first quarter results two brokerage houses Jefferies and Goldman Sachs had increased the target on Apollo Hospitals.

Santosh Meena, HoR, Swastika InvestMart, believes that while investing in any stock, its PE should also be compared with its EPS growth. We know the ratio of PE and EPS growth as Price to Earnings Growth or PEG ratio. It is important to look at this ratio because usually companies with high growth have higher PE multiple.

Meena also says that a PEG ratio of less than one is considered good but in a high growth economy like India, it is very difficult to find good stocks with a PEG ratio of less than one.

There are nine stocks with PE below 15 which have valuations lower than Nifty.

So now the big question is whether one should be cautious about all the stocks with PE higher than Nifty? And how can you strategize on stocks with low PE?

Santosh Meena believes that due to poor results in the last few quarters, the PE of a stock can become high just like in the case of Apollo Hospital.

Shares of Adani Enterprises and HDFC Life are expensive. Titan’s stock is expensive but will continue to give 10-12% annual returns. While Airtel’s outlook for the long term is also good. BPCL, Tata Motors and IndusInd Bank are attractive stocks with low PE. However, banking shares like IndusInd Bank should be assessed according to  Price to Book Value. From the perspective of 6 months, 20-25 percent return is expected. But investing with a 2-3 year perspective would be even better.