Stocks for 2005

I always believe that when real options are absent, DCF method is the only scientific method available to value a stock. DCF method emphasizes on cash flow, growth rate in cash flow and riskiness while valuing a stock. And a rational investpor should care for nothing else.

For a research journal, I was valuing the 30 stocks in Sensex as on 12 December 2004. I found that as many as 23 of the 30 stocks are grossly overvalued. I find that three stocks, namely Hero Honda, HLL, and HPCL are undervalued by the market. So much so that even if these stocks stop growing, one can still find the current values to be lower than the fundamental value.

Amongst the stocks valued at a very high level, Satyam, and Balaji televenture stand out. For Balaji Tele Venture, I found that even a 100% growth for the next ten years cannot justify the current stock price.

Subsequently I tried to value Sensex after deriving the values of all the stocks. Here instead of trying to value Sensex for some realistic growth projections, I tried to find the range within which it can fluctuate given the current madness of the stock market.

I found that if the market remains mad as it is now, the max value of Sensex will be about 6200. However, a more realistic value seems to be about 2300.





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