Do PE Multiples Matter?

C

cactiman

Here's some key points from a recent article in IBD. Any comments?

How important is the P-E ratio?
IBD research has found that... for great stocks, the P-E can't be too high or too low or even too average. It simply isn't relevant.

[Instead], focus on fundamentals that matter to a stock's performance.
[These] key elements include: earnings and sales growth, return on equity and profit margins, a new factor, accumulation, a leading stock in leading group, and fund support.

Some great winners had high P-E ratios at the breakout and scored big gains. Some had low P-E ratios and advanced smartly.

From 12/20/11 to 03/28/12:
AAPL (pe: 12 gain: 45%)
INVN (pe: 34 gain: 87%)
KORS (pe: 46 gain: 83%)
RAX (pe: 99 gain: 30%)
BWLD (pe: 28 gain: 34%)
SWI (pe: 33 gain: 25%)
 
Quote from cactiman:

Here's some key points from a recent article in IBD. Any comments?

How important is the P-E ratio?
IBD research has found that... for great stocks, the P-E can't be too high or too low or even too average. It simply isn't relevant.

[Instead], focus on fundamentals that matter to a stock's performance.
[These] key elements include: earnings and sales growth, return on equity and profit margins, a new factor, accumulation, a leading stock in leading group, and fund support.

Some great winners had high P-E ratios at the breakout and scored big gains. Some had low P-E ratios and advanced smartly.

From 12/20/11 to 03/28/12:
AAPL (pe: 12 gain: 45%)
INVN (pe: 34 gain: 87%)
KORS (pe: 46 gain: 83%)
RAX (pe: 99 gain: 30%)
BWLD (pe: 28 gain: 34%)
SWI (pe: 33 gain: 25%)
More...

All true, but you need to work in the uptrend of the overall market as well.
 
I brought this up because there have been lots of comments like "AAPL will keep going up because it still has such a low multiple", etc. Will it actually go up for that reason?

Looked up AAPL's 5 year PE info and found this:

Current: 18.04
Minimum: 11.35 (Dec. 2008)
Maximum: 43.53 (Dec. 2007)
Average: 21.31

Not sure what one can predict from this. Will it go back to the "average" level?

I'm not a big fan of average numbers myself.
i.e.
10 kids take a test. 5 get 100% and 5 get 50%. The "average grade" is 75%.
But no one actually got a 75! So what good is it?
 
I bet if you looked at the biggest losers in any given period, for instance NFLX last year, you'll find they are mostly stocks with high P/E's.
 
The market average is around 50

most companies are either too expensive to make real money or are one's you don't want to be near anyways

which means 50 is not -your- average, but most likely your high/sell mark

apple is around 20, less when you figure in the cash and long term dividends

companies with high pe generally means it's highly expected that they will be making much more money in the near and long term future (rackspace). lower pe's mean it's paying dividend, stable or undervalued.

cheers every1
 
ptrjon

I bet if you looked at the biggest losers in any given period, for instance NFLX last year, you'll find they are mostly stocks with high P/E's.

tenthousandmen

The market average is around 50
most companies are either too expensive to make real money or are one's you don't want to be near anyways
which means 50 is not -your- average, but most likely your high/sell mark
apple is around 20, less when you figure in the cash and long term dividends
companies with high pe generally means it's highly expected that they will be making much more money in the near and long term future (rackspace). lower pe's mean it's paying dividend, stable or undervalued.
------------------------
All good points. I guess PE's could be considered more important in relation to Selling, than in relation to Buying.
Always thought the "Value" approach was really unrealistic for the average investor/trader.
Like I could find an "undervalued" stock everyone else out there overlooked? What are the odds of that?
But I could certainly watch a stock go way up, and then make a rule to consider selling it after the PE had doubled or tripled, etc.
:cool:
 
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