Re: P/E
Hi Eric, this is the correct forum.
To explain your question (please forgive me if I am a bit verbose) I will give an overall view about company growth and P/E since P/E is a reflection of the company's potential growth as viewed by investors/traders (ie: the current price vs earnings per share)
The higher the company growth rate, the more expensive the stock, as measured by P/E. Growth stocks tend to have high P/E ratios, in the range of 25 to 50 times the annual earnings per share.
Investors tend to invest when they believe the company growth will accelerate, thereby increasing the price and the P/E. If the company is seen by the public to have a decreasing growth, the price tends to fall as well as the P/E.
With growth stocks, it is important to compare the earnings growth rate with the stocks P/E. Depending on the investors risk, one may consider a company with a growth rate of 20% and a P/E of 20 to be reasonably valued. A P/E which is as high as 25% above the growth rate may considered reasonable in industries like high-tech. Conservative approach would only consider stocks with a 20% growth rate if the P/E was less than 75% of the growth rate. (20 x 0.75 = 15, therefore the stock must have a P/E less than 15)
Analyzing P/E's and projected growth rates can help give the investor an indication of valuation. For example a P/E of 50 may be considered quite high, yet if the company's growth rate is estimated at 50%, then this stock would be at a discount in comparison to it's future earnings. On the other hand a stock with a P/E of 10 and a growth rate of 5% is considered overvalued.
If the company has a high P/E, the reasoning would be that it would have high growth expectations. If these expectations are not met, the higher the P/E, the higher the potential price fall. However stocks with low P/E's should not be so quickly considered based on the P/E alone. A low P/E may be a results of competition, low growth, earnings expectations and more.
Company's with low P/E's are generally considered more attractive because of two main reasons, 1) the stock will rise in price if the P/E rises to that of the industry, and 2) it can only go up. It is important when using a low P/E to always consider the companies potential growth in earnings.
Some extremely important tips about P/E:
* Current P/E has little meaning on forecasted price.
* Positive P/E conditions are that the company P/E is higher than the market P/E at the beginning of an up-trend.
* P/E's should be compared to similar companies in the same market as well as historical P/E values.
* If institutional ownership is low, P/E tends to be low.
* Companies with low P/E tend to be safer.
* Do Not buy low P/E stocks just because they are low, Do Not buy stocks just because the P/E is at a historical low and Do Not use P/E's as the only mean of analysis.
I hope this helps, please let me know if the adequately answers your question..
Alex
|
Linear Mode
