Peter Lynch in his famous book “Beating the Street” talked about buying stocks when they are below earnings line and avoiding to buy when they are above earnings line.
No Indian website provides this information readily like US websites. However with some work you would be able to create this on your own
- Go to Screener to get the ten yearly annual profit and loss , copy paste data it an excel
- Now get the total number of outstanding shares from latest quarterly fillings or from money control – Calculate diluted EPS , make sure you take latest outstanding shares
- Calculate 10 years , 5 year and 3 year EPS CAGR growth
- Now choose a fair PE based on EPS growth for page we have taken PE of 38
- Create an earnings line by multiplying fair PE and Diluted EPS
- Plot actual share price as on 1st may ( to avoid bias) for every financial year to compare earnings line with actual price
- Convert this into graph to get an idea when to buy
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As you can infer the best years to buy were 2009, 2010 and 2011 where price was below earnings line, investors would have made significant gains by buying in those years
Can you use this single chart to buy and sell stocks – NO
But this chart gives you a rational idea on when the market is under-pricing the company , download this Page_Price line analysis excel to create your own earnings line
New to this blog start here
I found this site which says it’s the Peter Lynch graph of indian stocks.
http://www.grafv.in/
Please tell me is it showing correct information?
Not sure on this website
I’m Stuck at calculating Diluted EPS.
Please assist me. I’m trying to use the data present in Screener.in.
Diluted EPS = Total Net Profit / Total Number of Oustanding shares
You can get Total Number of Outstanding shares easily from BSE website for a company
Oh wow!! Thanks for the quick response 🙂.
It only has certain stocks on that Screener site. None that I want to look at. Want to look at U.S. companies. Where can I get similar info for U.S. stock exchange companies?
Marketwatch may give US Data
can,t understand …how to calculate fair PE? plz explain
Rohan – Fair PE is guesstimate based on your understanding of business. The other way to look at it what is pre-tax yield of AAA bond and see if the company is producing similar returns or not. If still not clear let me know I can write a detailed note
Look at this – https://www.ppfas.com/media/articles/sanjay-bakshi/primer-pe-ratios.pdf
hi, how come your peter lynch chart looks different form that of gurufocus? theirs look like staircase?
Not sure are you able to share link
Hi this is the link from gurufocus :
http://www.gurufocus.com/news/220155/how-to-construct-peter-lynchs-valuation-charts-with-gurufocus-financials-charts-in-two-clicks
One quick question though – why you chose PE of 38?
-Kinshuk
You can choose other number Kinshuk ! I have just used this as an example
Wow…learned a new thing today. Thanks 🙂
Hello, In your point 2 – Now get the total number of outstanding shares from latest quarterly fillings or from money control – Calculate diluted EPS , make sure you take latest outstanding shares.
Do you take the number of outstanding shares for this year and use it for calculations for all previous years?
Yes Vineet that way you will get diluted EPS
Is this similar to the Peter Lynch Chart.. I thk Lynch used the actual earnings and the price of the stock and plotted similar one which is in logarithmic scale.
Yes it is Peter Lynch chart