Sell sell sell (for the time being)

The Indian markets are on fire again. The sensex has gained over 50% in a span of about 3 months. This rise has followed a disastrous year for equities of course. There are normally three factors that people track to buy or sell in the markets.

One is fundamental. This is the basics of the business....how a company's doing, are the sales rising/falling, are the profits rising/falling; how the sector is doing and in general how an economy is doing. The second reason is technical. This is more got to do with numbers than anything else. This basically considers different period moving averages. For example the 200 day average, 50 day average, etc. This is used mainly by traders. I have never understood how this works. But there are pundits who swear by this method and I'm sure this is something that cannot be totally ignored. The third category is the herd mentality. Market seems to be going up today so lets buy some scrips. The best example is the Reliance Power IPO. Everybody just had to apply as everyone else was. I too was enamoured by the idea of listing gains and got into the trap.

As for any product we have to also make an informed judgement while buying a stock. Unfortunately, there are no set parameters using which we can make that judgement. Each individual decides the value of a company and buys accordingly. There are a few simple terms commonly used like -

EPS - Short for earnings per share. This is the total profit earned by a company divided by the total number of shares. For example if a company earns Rs.1000 and the number of shares it has it 200 then the company has an EPS of Rs.5

PE - This is the ratio of the current market price to the earnings per share. If a company earns Rs.5 per share and is trading at Rs.100 then it has a PE ratio of 20 (100/5)

PEG - This is the ratio of PE to growth in earnings of the company. For example if a company earns Rs.4 in 2007, Rs.5 in 2008 the growth in profits is 25%. If the PE for such a company is 20 then it has a PEG of 0.8 (PE/Growth - 20/25)

The knowledgeable use these basics to value a company. Other things remaining constant a company generally is bought at PEG less than 1 and sold if PEG is more. However, this is a barometer using past figures in mind. Things could be different in future due to which many other factors that could affect a companies' performance has also to be considered.

As per http://www.bseindia.com/ the Sensex companies have an earning of about Rs.720 for FY(financial year) 08 and the index trades at about 16 PE. This means 16 times the combined earnings per share of Sensex companies. As per most brokerages the earnings of these companies would increase between about 10%-15% (best case) in FY09. This would bring the earnings to about Rs.790-830 per share. Going by the theory of 1PEG the fair value of the Sensex should be between 7900 to 12450. The Sensex has almost hit the upper end yesterday. Besides, the external factors also would play on sentiment. The elections are expected to present no clear winner. There is a good chance that the left parties and/or Mayawati's BSP would play a crucial role to form the next Government. This would certainly spell trouble. Uncertainty is something the markets don't like. Given this scenario I feel the markets are going to go down from here and based on the election results make the next move.