Comments on: P/E Ratios

By: Barb Friedberg

Barb Friedberg — Sun, 08 Aug 2010 19:38:41 +0000

With a title like that, I had to respond. As a portfolio manager of stocks, bonds, cash for a privately held corporation, I had to give my 2 cents worth. First off, investing in individual stocks requires a tremendous amount of research, reading annual reports, analyzing financial ratios, checking competitors, evaluating historical data and comparing with current trends, understanding growth drivers etc., Examining PE ratios is just one tiny piece of the picture. The most successful investors buy a stock when it’s valuation as measured by PE and other metrics is in the lower range of it’s historical average. That said, PE can be used as a sniff test for a stock to determine whether you want to investigate further. So, in answer to the question-YES, definitely use a PE. But I’m also moving more toward index and etf investing!!! Thanks for a thought provoking post with an open door to a great conversation.

By: Jenna

Jenna — Wed, 21 Jul 2010 22:20:47 +0000

Great example! Thanks the weakonomist!

By: ajc @ 7million7years

ajc @ 7million7years — Tue, 20 Jul 2010 04:53:33 +0000

“I’m not trying to outsmart the market — any information I have about a company must already be common knowledge and included in the stock price”

Warren Buffett (and his checkbook) would disagree; his recent pledge to donate the vast majority of his personal wealth to charitable causes included this statement: “My luck was accentuated by my living in a market system that sometimes produces distorted results”.

I rather like a book called Rule # 1 Investing by Phil Town, which has a highly practical method to find those ‘market distortions’ … at least, when it comes to individual stocks. P/E is just one of the measures that he uses; another is Earnings Per Share growth.

BTW: stock splits don’t affect the P/E ratio, because both Price and Earnings are ‘split’ :)

By: the weakonomist

the weakonomist — Tue, 20 Jul 2010 01:52:43 +0000

For example: BP’s PE is 5.6 whereas Visa’s is 22.1. BP looks like a value but investing on that notion alone is… risky to say the least.

By: the weakonomist

the weakonomist — Tue, 20 Jul 2010 01:47:21 +0000

I’m with Curmudgeon, PE is the price. I also like the mention of Shiller’s PE as it’s a good stat that says the market is overvalued. I’d say PE is a good intermediate investor stat. But for someone that’s just getting started in investing it should be largely ignored until they know how to tie a balance sheet to an income statement.

By: Investor Junkie

Investor Junkie — Tue, 20 Jul 2010 01:33:22 +0000

Don’t forget the grand-daddy of them all, Berkshire Hathaway (A Class) shares, which never has split since it’s inception.

http://finance.yahoo.com/q?s=BRK-A

Currently trading at $116,141 a share. I believe it is the most expensive stock per share.

By: Frank Curmudgeon

Frank Curmudgeon — Tue, 20 Jul 2010 00:36:48 +0000

PE is the first thing I want to know about a stock. I guess I really think of it as the price. Ultimately, stocks are only worth something because they are a share of future profits, and understanding what you are paying per dollar of those profits is what it is all about. Of course, a PE is just a snapshot, what you are paying per dollar of last year’s profits, but that’s a great place to start.

Price, the dollars per share that the stock trades at now, is, in and of itself, basically worthless. That Apple and Google haven’t bothered to split doesn’t tell you very much, if anything at all.

Just my non-humble opinion.

By: Financial Uproar

Financial Uproar — Mon, 19 Jul 2010 23:58:09 +0000

P/E should only be one of the things an investor should be considering when looking at an investment. An investor should consider price to book value, debt to equity, return on equity, as well as other ratios.

I agree with Investor Junkie’s point. P/E is an imperfect indicator. Most investing websites track trailing P/E (last year’s earnings) while could be much higher than this year’s. If a $10 stock made $2 last year, it would seem very attractive from a P/E standpoint. If that company only expects to only make 50 cents this year, then it isn’t that attractive.

As for looking at price when buying, I think it’s important. For every stock I buy, I establish a price target. I only typically buy stocks that are below $25, that have spent considerable time at higher levels. Usually I’m going for at least a 100% price appreciation.

By: Investor Junkie

Investor Junkie — Mon, 19 Jul 2010 18:21:05 +0000

Hi Jenna. See my above post for the entire market. If you look at the P/E over 10 year avg (which smooth things out) we are slightly above average. In simple terms, things are not cheap at 19.41, but they are lower than previous.

For specific stocks you can visit Google’s or Yahoo’s finance section. As far as the lowest P/E stocks on the stock market, keep in mind low P/E does not equal a great investment. A stock can have a low P/E for other reasons, that may not make it an attractive buy. Don’t buy a stock JUST because it has a low P/E.

Hope this helps..

By: Jenna

Jenna — Mon, 19 Jul 2010 18:02:49 +0000

I’m just starting to invest so I’m not currently looking at P/E ratios, but would be interested to know what stocks have good P/E ratios right now. Do you know this? Or know a good site to find that information?

By: DM

DM — Mon, 19 Jul 2010 16:34:11 +0000

“When I do invest in companies, I look mainly at stock price.”

Isn’t stock price completely arbitrary due to stock splits? If a stock is at $100 a share one day and then splits 2 for 1, the next day it is $50. Nothing about the company has changed, but the price of a share of stock has drastically changed. It seems share price should have very little to do with your decision to invest in a company. The only exception I could see to that would be if the stock price were at the extremes, such as a penny stock or berkshire hathaway.

By: Investor Junkie

Investor Junkie — Mon, 19 Jul 2010 13:15:23 +0000

“Do you look at P/E ratios when you invest?” Yes BUT it should not be the only factor when determining should you invest. Also a great site that shows the P/E Ratio from Robert Shiller’s data can be found here:

http://www.multpl.com/

It’s a rolling 10 year P/E ratio.

Using P/E means you are following a value investor philosophy. Nothing wrong with this methodology (as I believe it is the best method for a retail investor), but you have to consider a stock with a low P/E may or not be a good stock to invest in. The analogy is like buying clothing on sale. Is it really on sale, or was it marked up and discounted? (meaning it’s really not cheap). In addition, you shouldn’t buy an ugly Hawaiian shirt no matter how cheap it is. You’ll never wear it

From the NYT article about Jeremy Siegel I finally got on my Kindle his book “Stocks for the Long Run”. So far a great book BTW and inline with greats from William Bernstein and Benjamin Graham.