Is the NSE Overvalued? YES and here's why The NSE is overvalued when you compare it to ther markets in terms of P/E ratio and dividend yields. Take the current darling of the exchange KENGEN. the whole week people have been telling me what a great buy it is at sh.37/- 34/-.The P/E is 41. the Dividend yield is 0.67% REMEMBER; that you can only make your money on the Stock Exchange in two ways :
1.The Earnings at Kengen grow at a fast rate 40% plus a year.Consequently the share price appreciates. You get Capital Gains(price rises lets say to Ksh.60)
2.The Dividend grows at a fast rate lets say 50% annually.
How likely is it that KENGEN's turnover will grow at a rate of 40% every year for the next 3 years.Remember its turnover is sh.11 Billion and Pre-Tax Profit is Sh.2.6Billion. If the Turnover grew at that rate it would be at Sh 30 Billion and profit at sh7.1 Billion in 3 years.That will be larger than EABL in turnover. I would say highly unlikely.
Then you are left with the second option, a high price that enables you to book Capital Gains.This is what is hapening now.But at some point the price has got to stop rising.Even a good company can become over-priced.Yes, you can pay too much for something.
Now don't get me wrong i'm not against KENGEN, i used to hold its shares and will buy them again at a cheaper price. The issue is that most of the co.s listed today can only make you money if the stock prices kept rising at current rates for the next 3-5 years(and dividends at least 20% annually).Look at ARM,Bamburi,CMC,HFCK,National Bank,KCB, EA Cables........... same story.
The NSE now is a traders' market not a value investors market so application trading tactics for success is necessary.
So, If the NSE is overvalued why is it still trading at high prices? There are two factors: INTEREST RATES: As long as rates remain below inflation and below 10% it still makes sense to buy a stock with 3% Dividend yield and 10% capital gain.If rates go back to double digits T-Bills will be popular again.
IGNORANCE: If people have no alternative investment avenues especially Fund managers. They 'll just keep pouring money into the market regardless of the valuations.After all in the short term they make a kill on the market, in the Long Run....heck it'll be someone else's problem.
There are alot of new players in the market who are unaware that the value of your shares can go up or down.They look at the relative price from Ksh.100 to judge the value of a share.The lower the price and the more often its mentioned on news-The higher the value. These are the people driving the prices up
NEXT WEEK i will give you an alternate view on the valuation of the NSE.