Should you buy a company that’s available at
1. Low PE (Cheap)- Less than 7
2. Attractive Dividend Yield (More than 4%)
Here’s what one stock with the above characteristics has done in an extremely bullish environment – Ford
Just because stock looks attractive on fundamental parameters does not make stock a buy. If market is worried about the future of the industry/business for whatever reason – the stock will fail to outperform. I tweeted about the stock in Oct 2016
Ford: PE = 6; Dividend Yield = 5% – Why no takers
Value Trap? pic.twitter.com/D6RbIMPScz— Deepak Singh (@smarket) October 11, 2016
There is market view that Auto Industry is set for massive disruption from ride sharing to connected cars to Electric cars to Self driven cars. And it’s quite simple to understand – why market is little cautious to take a big bullish position before such dramatic change. Now, you can disagree with that stance. Ford continues to sell record number of pick-up trucks – it’s most profitable product but when you are in the market – It is the Opinion of the market that counts.
Ford right now
Another Example: Micron Technologies
Micron Tech is trading at a forward PE of 4, has a market cap of $56 bn and is going to buy back $10 bn of shares. Yet no takers for the stock as everybody worried about fall in memory chip prices. "The sky is going to fall" mindset working against the stock
— Deepak Singh (@smarket) August 17, 2018
Never buy a stock just because it’s trading at Low PE
One thing you always learn in the market – Cheap stocks only become cheaper with time and expensive stock continue to become expensive.
Micron Tech trading at rock bottom valuations less than 5 PE and despite that – the stock got maximum hammering over last 2 weeks— Deepak Singh (@smarket) August 17, 2018
This is what happens when you get attracted to low PE plays
Micron was a Screaming Value buy between $52-56 just last month only. [Mouthwatering PE] Now the stock has tanked to $42 and every analyst in the town is downgrading the stock. I hate low PE stocks. pic.twitter.com/LFpfbV6uDg
— Deepak Singh (@smarket) September 13, 2018
Price Action is one of the best ways to make good investment decisions. That’s what I teach all the time.
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers