First, list all stocks with Price/Earnings ratios below 9. Note: Graham was writing in 1970 when P/E’s as a whole were not as elevated by technology stocks as they are today. Readers who are less risk-averse or who just want to consider a wider range of stocks may wish to vary the P/E in order to see what comes up — perhaps up to 80 percent of the average P/E of the S&P 500 would be a good start. Currently the operating average is around 18 and 85 percent of that figure is just over 15. Graham did not state if he was using a Trailing or Forward P/E ratio, but most likely he was using Trailing P/Es. I personally prefer to use Forward P/E ratios, especially if they are significantly lower than the Trailing P/E as this implies expected earnings growth and therefore possible increase in the stock price.

Once we have a list of stocks meeting the P/E criterion, we consider the financial condition of each stock, referring to the most recent balance sheet: Initially, Current Assets must be at least 1.5 times Current Liabilities. This can also be gleaned via a stock screener by displaying stocks with “Current Ratio” >= 1.5. Total Debt must not be greater than 110% of Net Current Assets (i.e. the sum of Cash & Cash Equivalents, Inventory, Accounts Receivable). Looking further back, we need to find evidence of Earnings Stability, with no deficit in the last five years, i.e. no evidence of an annual loss. Additionally, evidence of earnings growth over a five-year period is a must. This can simply be the consideration, for example, that 2004 earnings were greater than 2000 earnings.

There should be some current dividend payout. Finally, the current price of the stock should be less than 120% of the NCAV per share or Graham’s Number. Where to find this number? From the balance sheet, subtract Total Liabilities from Current Assets, and divide the result by the number of shares outstanding. Assuming you have a positive number that is greater than zero, the stock’s price should not be greater than 120% of this number.

Source: Value Investing Portal

1. Guide To Investing In Stock Market (Part I)
2. Guide To Investing In Stock Market (Part II)
3. Introducing The Indian Indices- BSE Sensex and the S&P CNX Nifty
4. Market Timing Or Time In The Market
5. Importance of Asset Allocation
6. Lessons To Be Learnt From The Recent Correction
7. Investors should have a Long-Term Horizon
8. Valuation And Valuation Techniques
9. Enter The Stock Market When No One Dares
10. How To Survive In A Bear Market - A Warren Buffett Style

Today, some large cap stocks and some mid caps have posted their advance tax numbers for FY08 Q4. I find some stocks interesting based on those numbers. That includes Reliance Industries, Indian Hotel, ICICI Bank, L&T, HDFC Bank, State Bank of India, and Bank of Baroda. Yes, you could see more good numbers of other companies but these are simply my picks.

Comparison Of Advance Taxes Q4 FY08 and Q4 FY07

Reliance Industries has paid Rs. 443 crore versus Rs. 118 crore.

Indian Hotel has paid Rs. 44 crore versus Rs. 2 crore.

L&T has paid Rs. 170 crore versus Rs. 80 crore.

ICICI Bank has paid Rs. 250 crore versus Rs. 125 crore.

HDFC Bank paid Rs. 250 crore versus Rs 165 crore.

State Bank Of India has paid Rs. 1418 crore versus Rs 690 crore.

Bank Of Baroda has paid Rs. 50 crore versus Rs 220 crore.

Source: Moneycontrol

Economic Times reports that the current valuations looks reasonable. I’ve analyzed the same and reached into my own conclusions. They says that at the peak of dotcom boom in 2000 SENSEX P/E was around 28. But I have got a chart of the same and it shows that SENSEX’s P/E Multiple during the dotcom boom was as high as 35.

Again they reports that "The BSE Sensex hit the bottom at 2,924 points in April 2003, when its P/E declined to 12.7". So it means that if we were to trade at the same P/E then SENSEX could go way down to 12,000 to 12,500 levels. Marc Faber earlier said that SENSEX may test 14,000 levels before slipping down to 12,000 levels.

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What determines stock prices?

Stock prices are driven by market information in the short term. In the long term, dividends, bonus, capital expenditure plans, mergers and acquisitions, and government regulations affecting the sector together add up to impact stock prices.

How much does a share cost?

The market sets the price and it all depends on how many buyers and sellers think the share is worth that much on that day. Some stocks sell for less than Rs 10 a share, others for more than Rs 1,000 a share. But do not be misled that a Rs 10 share is better than a Rs 1,000 share. The market determines the price of each stock, depending on the company’s potential.

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