In the stock market, there is a saying that goes: the daring will starve to the death of the timid. But when investing in cyclical stocks, this is not the case, because the bold die fast!
In order to learn from Buffett, the author imitated PEG and invented a valuation parameter called “price-earnings ratio”. The formula is: price-earnings ratio = price-earnings ratio/return on equity (PR=PE/ROE). When the price-earnings ratio is equal to 1PR, it is a reasonable valuation, and if it is greater than 1PR and less than 1PR, it is overvalued and undervalued. Buffett’s classic investment: See’s Candy. The market-to-earnings ratio = 12.5/25 = 0.5PR, which is equivalent to buying at half price. Buffett claims to have changed from “ape” to “human”! In addition, for a more conservative valuation of cyclical stocks, the earnings per share and ROE in the first year of the cyclical stock boom cycle can be used to calculate the price-to-earnings ratio. Buffett’s investment in Occidental Petroleum is also the same method!
The reason for using the financial report data of the first year of the boom cycle is determined by the characteristics of cyclical stocks. If you choose the financial report data of the second year, the third year or even the peak of the business cycle, even if the stock price soars N times, there will still be an underestimation of “high ROE + low PE”. It is also for this reason that cyclical stocks will show the remarkable characteristics of “low PE + high PB” at the peak of the stock price. If you have the guts to see that the PE is very low and buy it, it is very likely that you will stand guard at a high position!
Looking at the hot coal stocks in the market objectively, if the earnings per share and ROE in the first year of the business cycle are used to calculate the price-to-earnings ratio, it will still be found that they are generally undervalued! Considering that Buffett sold PetroChina H shares at a price-earnings ratio of about 0.8PR (8 times in 4 years), coal stocks generally still have a lot of room for growth (just 2 years)!
Next, the problem comes, even if the earnings per share and ROE of the first year of the business cycle (that is, last year) are used to calculate the price-to-earnings ratio, Yankuang Energy H and China Coal Energy H still have room to double. In all fairness, the possibility is not too great!
At this time, it is necessary to introduce industry benchmarks. In the liquor industry, Kweichow Moutai can be used as a benchmark. After Maotai is overvalued, other liquor should be sold! In the coal industry, China Shenhua H can be used as a benchmark. After Shenhua is overvalued, other coals should be sold!
As mentioned earlier, cyclical stocks will show the remarkable characteristics of “low PE + high PB” at the peak of the stock price! At present, China Shenhua H is only slightly higher than its net assets, and China Coal Energy H is still in a state of “broken net”. You say it’s “high PB”? I said I don’t believe it!
The last thing to say is that the valuation repair of cyclical stocks is by no means an overnight success, and it may also die in the middle. It is for this reason that the author’s strategy for coal stocks has been to sell more and more. Unless there is a sharp drop, it will cover some. As for the remaining funds, it is to copy Buffett’s work and buy Dongfang Oil (China National Offshore Oil), and the margin of safety is better than that of coal stocks!
$China Shenhua(01088)$ $China Coal Energy(01898)$ $Yankuang Energy(01171)$
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The price-earnings ratio cannot be falsified 1: PetroChina: web link
The price-earnings ratio cannot be falsified 2: Coca-Cola: web link
P/E Ratio Unfalsifiable 3: DCF Calculator: Web Link
Domestic Application of Correcting P/E Ratio: Web Link
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