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

  1. Go to Screener to get the ten yearly annual profit and loss , copy paste data it an excel

EL-1

  1. 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
  2. Calculate 10 years , 5 year and 3 year EPS CAGR growth
  3. Now choose a fair PE based on EPS growth for page we have taken PE of 38
  4. Create an earnings line by multiplying fair PE and Diluted EPS
  5. Plot actual share price as on 1st may ( to avoid bias) for every financial year to compare earnings line with actual price

EL-2

  1. Convert this into graph to get an idea when to buy

 

EL-3

 

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