Stock Re-Rating: If you have an interest in the stock market, you will often hear about the re-rating term of the stock. Many times analysts also say that this stock is ready for re-rating or these shares can be re-rated. While reading the stock market report, you must have read this word somewhere. Investors usually do not fully understand what it means and what it means. Let’s discuss what re-rating means. At the same time, how investors should organize their portfolio to achieve higher returns.
What is re-rating
A re-rating in the stock market means that investors are willing to pay more for those stocks that are expected to earn more in the future. Such pre-estimation is due to the sentiment of the investor and the possibility of the future of the company. It can be understood with an easy example that the shares of a company are trading at a price of Rs 100 per share with 10 times earnings per share (EPS). This means that the price to earnings ratio (P / E) is 10.
When the share price rises by Rs 200 and EPS also increases to 15, the new P / E will be 13.3, which is more than 10 in the previous period. If the market is willing to pay a higher price than the earnings for the company’s shares, it is known as ‘re-rating of shares’ by the market. Basically, a change in the investor’s sentiment leads to a re-rating of the stock due to the long-term prospects for the company’s earnings.
Re-rating occurs due to many reasons
It is clear from this example that when the company is rated again, its P / E expands with a significant improvement in the fundamentals. The major point seen by investors is that although income improves, P / E growth alone creates wealth for investors. There are several reasons for the increase in P / E.
First and foremost, when re-rating, institutional investors are usually excited by the company’s prospects and start buying shares. Sometimes, that you or the sector associated with it can be re-rated, which makes the sentiments better. For example, in sectors such as banking and PSUs, fresh boing is visible due to re-rating.
Re-rating is related to growth
Generally, when a company shows steady growth, it is rated again. Also, if there is uncertainty about the prospects of the business, then there is a D-rating. Identifying shares before re-rating is not an easy task, however, one can identify a company with a low P / E ratio. There is no re-rating of those stocks which are trading at a high multiple. Companies that have performed better than anticipated for the long term may re-enter the rating.
To evaluate companies in which they are most likely to be re-rated, one must have a complete understanding of valuation. In addition, there should be the ability to identify important successful factories of that company.