Stock performance in 2018 has been polarised. Investors have piled on to the so-called growth stocks (typically, companies that consistently post superior growth in sales and profitability). This has resulted into soaring of valuations of such companies. The turmoil in the market has helped bring down valuations a bit.
However, they remain away above their price-to-earnings (P/E) multiples seen in the past few years. For instance, Nestle India’s stock currently trades at 58 times its one-year forward earnings estimate. While the P/E is down from 63 times in March, it is way higher what the stock commanded in the past few fiscals. “Most of the ‘growth’ stocks have seen sharp re-rating over the past few years, although some have seen meaningful de-rating in the past 12 months,” Kotak Institutional Equities has highlighted in a recent note.
Meanwhile, stocks that trade at attractive valuations have failed to enthuse investors. Stocks such as Power Grid and Coal India trade at P/E multiples that are much below their historical levels. “The multiples of ‘growth’ stocks have expanded significantly over the past few years, following the sharp decline in global bond yields and the market’s increasing focus on earnings growth and ‘quality’ of companies. However, the multiples of certain ‘value’ stocks have contracted in the past 12 months on sector- and stock-specific concerns, apart from re-emergence of governance worries in the case of most government-owned companies,” says the Kotak note.