Why would a stock higher valuation? Why some stock run madly? There has always been a question about the meteoric rise of stock For
example, the recent surge of Adani green has popped up many eyes.
The problem is about the high valuation. Whether it is justified or not? A
a similar concern arises when the stock has given a movement from 50₹ to 100₹.
It continued its journey from 100 to 500, and 500 to 1000 amidst all the
pessimism surrounding it.
So What you think Now?
Now, even a layperson can understand that.
It is not possible to enjoy this valuation without the massive investment of
the institutional players. So, what makes it so much interesting for them which
retail traders are missing out?
Well, it is the nature of the market to give premium valuation considering
its futuristic earnings. Because of this, a debt-free company like CoalIndia
with 79% dividend payout and 2950 cr profit is quoting at 52 weeks low.
And the company which is having an only 18cr profit (Adanigreen) has moved
ten times beyond its valuation. The reason being the future of coal is bleak while solar or green
energy is where the entire power sector is focusing. Therefore, after ten
years, this profit number will reverse, and the market has discounted that
already in the current price.
So All thinking Bigger picture?
Just imagine the hassle we used to face when Zomato or Swiggy was not around
the corner. Today in only one year, Zomato’s revenue became four times (41$
million) so before two years who understand this valuation, and loss is 12$million. Despite the loss, its value at 3.3 $ billion.
The reason is the prospect is exceptionally high for food delivery apps. The
same goes for OYO rooms, AIRBNB, UBER and many other unicorns.
Is Old Theory of analysing a company became obsolete now?
Therefore, the old school thoughts of only looking at the past financial
performances and ratios like ROE, ROCE, PE and EPS have now become obsolete for predicting stock valuation.
The companies having futuristic business model and effective management tend
to enjoy premium valuation.
The only important factor which you must keep in mind is that the price
which moves high must keeps on moving higher. As price discounts everything,
you must concede with the market price.
Acceptance of new standard in the investing world should be beneficial for
you, in the hindsight if you have a pessimistic approach without understanding
the changing scenarios you will be in the losing end. Stay with winners and
ride them.
Regards,
StockTradingF&O team
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