Current Buys, Why we should not go by historical P/E

Can never understand why plots like these are used to dupe people:




Though the fact that there are buying opportunities remain, the fact that historical P/E chart is not a good indicator seems common sensical to me.

If E keeps falling faster than or at the same rate as price, then P/E will be falling or constant even though your P is falling. This is exactly the situation we are facing.

P = R - C ( Profit = Revenue - Costs)

C = FC + VC (Costs = Fixed + Variable). Most companies have invested so much in fixed costs or in the process of investing that though R has come down, C continues to remain high , because either FC is high or they are in the midst of a capex cyle (or have completed it taking huge debts, which is why FC is very high again).

All RE companies, companies like Aban Lloyd, Tata Steel are prime examples.

There definitely is value in some of these companies, but what infuriates me is the use of the chart above which obviuosly is not conclusive.


My buys in the market:
a) Patni (NSE PATNI)( Cash in hand > Price per share + EPS is +ve historically and going forward)

b)ICICI Bank (NSE ICICIBANK)(Taken a hit, being valued at P/BV ratio much lower, oversold by FII's after Lehman mishap. I'd have loved to pair this trade by shorting HDFC which I think is being overestimated. Need to come back and check this hypothesis).

c) Balmer Lawrie and Balmer Lawrie Investments(NSE: BALMLAWRIE): PSU, so no scope for default, low P/E multiples, better visibility.Investment company at a further discount, so double the brownie points there.

d) Roman Tarmat(NSE ROMAN): I seem to like the company, smallish (so off-radar for most big investors who would'nt even bother report this company. Good cash-pile, low debt, good order book and a land bank thats not valued at all. Companies where land-bank is not valued and operational earnings justify P/E are my love.) Very little info. on this company though, would love to check if anyone has researched or tried to research this company.

e) L&T(NSE: LT) (Oversold and of all investors, I definitely back getting into Satyam fray, if not for acquiring, then at least to ascertain that BK Modi does not get this for pennies only to be sold off later).



Disclaimer: I own all 5 of these stocks, though only 1) and 2) have been added to the stock lately, others are historical buys. Waiting for cash accrual so that remaining can be bought :).