Focused firms get a higher P/E rating
by Sanat Vallikappen - DNA Money
In a rising market, the less diversified a company’s business is, the more the tendency for its stock to command a premium over listed peers. In other words, investors tend to value a company higher if it is focused on a particular business.
But this scenario, lest it be misunderstood, is true only in a rising market and doesn’t always hold true. At the end of the day, it’s the investor’s view on a company that helps him decide how much he should pay for it, regardless of whether it operates across businesses or concentrates on a niche segment.
While C.K.Prahlad's Core Competence arguement does hold true and does create value for shareholders, it's actually a lot more dependant upon external factors. In emerging markets like India and China Companies always have opportunities and they can grow with comparitive ease. Core Competence perhaps is better for Mature Markets like the USA or some European Economies. Focused Companies thus should be samples across various Economies around the world to end up with a more broad based study.
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