Mohnish Pabrai's PE of 1

If you sift through companies with a PE of 40, you'll find plenty, but the pool diminishes as the PE drops. However, Mohnish Pabrai advocates seeking out companies with a PE of 1. While it may sound absurd, it's a strategy that actually works.

Pabrai argues that PEs of 10, 20, 30, etc., are all non-hidden PEs, whereas a PE of 1 is a hidden gem, and that's what he urges investors to uncover.

There are two methods to uncover these hidden PEs of 1. The first involves predicting future earnings. Pabrai cites Fiat Chrysler as an example. In 2012, it traded at $5/share, and he foresaw that its EPS could reach $5 in the future. By 2018, this prediction came true, resulting in a 7 to 8x return for Pabrai.

The second method involves excluding a company's cash reserves. Pabrai illustrates this with IPSCO. He invested in IPSCO when it had a PE of 3, but since a third of its market cap was in cash, adjusting for this yielded a PE of 2. He anticipated this stock would yield returns in just 2 years, but within that time, the company was acquired, providing him with a 4x return.

How about in the KLSE? I'd venture to say that it's not particularly difficult to identify companies with a PE of 1 by disregarding their cash reserves. Take $LYSAGHT / 9199 (LYSAGHT GALVANIZED STEEL BERHAD) for instance. Presently, the company boasts a market capitalization of approximately RM108.5 million, yet it holds net cash totaling RM94.94 million. This implies that 87.5% of the company's market capitalization consists of cash. By excluding this cash, the PE ratio dwindles to just 1.2.

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