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Monday, February 8, 2010

The Ultimate Fundamental Analysis - S&P Nifty


One may wonder why a blog, which claims to be the source of The Ultimate Momentum Signal (based on technical analysis) is now talking about The Ultimate Fundamental Analysis of S&P Nifty Index.

The reasons are:
  • History repeats itself, even though participants, sectors, investing styles, fashions, fads etc may change in each bull / bear markets.
  • There will always be analysts, especially the TV variety, who will always say 'this time it's different.'
  • It's always better to have a meaningful understanding of the market from another perspective.
  • It may help us to make an intelligent guess about the different phases through which each bull/bear market may pass through and the present phase of the market from the fundamental perspective.
Now let us check out the Nifty from the perspectives of historical  Price Earnings Ratio, Price to Book Value Ratio and the Dividend Yield. The data for this analysis is available for the past eleven years only.

Nifty  Historical Price Earning Ratio
 


Any casual observer of the above historical P/E chart can see that the highs are between 25 and 30 and the lows are between 10 and 15. There you are! You have just solved the Nifty fundamentals.

One more careful observation will make you understand that the above referred data points of highs and lows were actually the extreme data points and for most of the other times the highs were at 21 to 23 and the  lows were at 14 to 16. ( For more information see the chart named Nifty - Extreme Valuations).

Please remember that we have till now used only simple common sense and that alone has made us far better analysts than the majority. ( After all who says that simple common sense is common! ).

Nifty Historical Price to Book Value Ratio

Let's begin our observation of the historical P/BV chart. It seems that the maximum P/BV achieved during the dotcom boom was 5 whereas it reached a high of 6.5 during the year 2007. ( The reason for the above disparity is none other than the dotcom era neglect of the smoke stacks!! ). Other than the above, we can see that many tops are placed in between 3.5 and 4.5. Therefore, it can be said that a P/BV ratio higher than 4.5 times the book is achieved by the market only in the blowout stages of the bull markets. However a word of caution too! The market can and it will remain significantly overvalued / undervalued in raging bull markets and extreme bear markets respectively for significant time periods.

Nifty Historical Dividend Yield   
 

We can see that most of the data points in the Dividend Yield chart lies between 1 % and 2 %. Any values beyond this range has obtainable only for limited periods. See that a yield of 3.2 % (approx.) was available just before and during the start of 2003 - 2007 bull market. Even after the crash in 2004, the yield was at a high of 2.75 % points. At the bull market highs of 2000 and 2007 the yields went down to as low as 0.5 % and 0.75 % points respectively.

For an easy comparison study of the above charts, a chart of S&P Nifty for the corresponding period is also appended below:

S&P Nifty

The following table compiles the extreme data points of  Price Earnings Ratio, Price to Book Value Ratio and the Dividend Yield  and it's long term averages in color codes which are self explanatory. These are real historical data and are neither fiction nor anyone's opinion. From now on no one needs to try to find out where the market highs and the lows may form and why by using some common sense. However, the word of caution needs to be repeated here once more! The market can and it will remain significantly overvalued / undervalued in raging bull markets and extreme bear markets respectively for significant periods. Never jump the gun! Just keep the powder dry.

S&P Nifty - Extreme Valuation Points


Conclusion

S&P Nifty Valuation Guide

It seems that the time to conclude this post has arrived. Here is the final disclaimer.  The above valuation guide is just the considered opinion of  momentumsignal and not any fundamental truth. One may consider, reject or ignore the stated opinion. Or one may  also examine the effect of rate of growth of profits on the above ratios by looking up for PEG Ratio.

Today the S&P Nifty closed at 4758.30 and the Price Earnings Ratio, Price to Book Value Ratio and the Dividend Yield are at 20.36, 3.35, and 1.04 respectively.


Happy Investing and Trading!!!

You can read the Info on the Ultimate Momentum Signal from here.
You can also checkout the five year history of The Momentum Signal Spreadsheet from here.


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