PE Ratio (100) = Recipe for Disaster

What happens when the PE ratio of a stock hits 100 and beyond?

Learn this very important lesson if you have got anything to do with the stock market.

This is a weekly time frame chart of Asian Paints, one of the most famous companies in India.

As you can notice on the chart, the stock hit its all-time high price of Rs. 3590 sometime in early 2022.

Subsequently, on Friday, 21 January 2022, the stock closed below its 10-week simple moving average, especially on high volume.

For any technical trader worth his salt, that was a clear sell signal.

For any technical trader worth his salt, this was an absolute no-brainer.

Look at what happened after that.

From an all-time high price of 3590 in January 2022, the stock collapsed nearly 40% over the next 3-4 years to reach a low of around 2124 somewhere around March 2025.

All the while during this 40% collapse, the company had pre-tax earnings of nearly Rs. 22,000 crores, something which very few companies in India are able to achieve.

So the point is this.

Even if a company is making huge amounts of money on a pre-tax basis, it does not mean that shareholders are making money.

In fact, shareholders who entered the stock in early January 2022 lost around 40% of their capital over the next 3-4 years, that too in a very celebrated stock in India.

An interesting thing to notice is that in early January 2022, the stock was trading at a PE ratio close to 100.

I personally have nothing against the PE ratio.

I am not judging.

I am just reporting.

I am simply observing on the chart what tends to happen when a stock’s PE ratio goes beyond the realm of 100.

This chart of Asian Paints is a clear warning sign for traders and investors alike that valuations do matter.

Irrespective of how much money or how much cash flow a company reports, it does not guarantee that you will make money on the investment.

I still remember that during the early 2022 or late 2021 period, many expert fund managers were openly talking about how great the company was and why investors should load up on the stock.

This clearly goes to show that not even experts who have spent decades trying to understand markets, stocks, and their behaviour are able to predict what will happen over the next three to five years.

A hugely profitable company can still deliver mediocre or even poor results for investors and traders.

I personally do not consider myself a value investor.

I consider myself a swing trader and a positional trader.

Positional traders know very well that when a stock breaks its 10-week simple moving average, especially on high volume, the story for the stock is already over, at least technically.

I do not know much about fundamentals, but technically speaking, we have no business hanging around such a stock.

Asian Paints is a great example of why the 10-week simple moving average, or the 50-day simple moving average, matters so much for technical positional traders, especially on the weekly timeframe.

If you combine elevated valuations with a decisive break of the 10-week simple moving average, the decision to exit the stock, or to stay away from it, becomes an absolute no-brainer.

Meanwhile, during this same period, there were many stocks that went up 100%, 200%, and even 400%.

So just because a company is making huge amounts of money in its business operations does not mean that you, as a trader or an investor, will make money in that stock.

Many people have learned this lesson the hard way.

It is better that you learn this lesson from this post itself.

Regards,

Rohit Musale, CFA

PS: To save tons of your learning time, enroll in my

Swing & Positional Trading Video Course

PPS: Follow me on X: Rohit Musale, CFA