Using P/E to determine shorting opportunities

birdog,

Thank you for making my point about tech stocks with no earnings and ridiculous P/E's.

Remembering that this thread is about using P/E's to determine SHORTING OPPORTUNITIES, presentation of opinion about buying low P/E's is somewhat off topic. And since investors buy stock, and this thread is about shorting stock, then indeed it still qualifies as a trading thread.

If I run a scan for NYSE stocks with a P/E of 40 or greater, it might turn up something that looks very extended and I can put it on my watchlist. Hint: like a lot of the small cap and mod cap stocks that rallied last year this time. It also helped me to nail GM for 25 points and EXPE for 20 points. But hey, that is probably small potatoes for you.

Maybe you could start a thread about how much hogwash it is to use P/E's to buy stocks. Then you can reprint your post there, and it will be a dandy good time!!!


:)
 
You shorted stocks in a bear market and made money. What if you would have tried your P/E strategy in 1998? You would have been CRUSHED. P/Es don't matter. Supply, demand, shown in price and volume is what's important. People are often willing to pay a lot of money for things that don't apparently have much value. It's not a traders job to know what something is worth. It's knowing if supply or demand is going to swing one way or the other.
 
Originally posted by birddog


What changes is expectations of earnings.
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Isn't that what P/E's suggest ? P/E is not static. Also related issues may have related P/E .....
 
Originally posted by inandlong

It also helped me to nail GM for 25 points and EXPE for 20 points. But hey, that is probably small potatoes for you.
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now those are a couple of mighty fine trades. maybe we'd better start calling you inandshort? (care to throw us risk:reward# on those babies?)

take those just on the pe? or combined it with your 50pd MA cross too? (great looking "example trades" if you ever write a book :))

re why we pay multiples of earnings.. stockholders expect the earnings of the companies to grow right? at least that's how it's rationalized, since i suspect that these "investors" don't really give a damn about sharing in earnings, but have their eye fixed on potential for capital appreciation. in other words, "buy and hope".
 
daniel I think you are right about muliples.

And yes you are right again about the ma cross. That is where I got in short on both. As you see, neither of those two ever looked back. So many name stocks were tanking in the spring but these two just kept going up. Their P/E's were way too high, EXPE's still is. And a lot of guys don't care for the MACD, but using it for divergences is great. Look again at both of those and you'll see what I mean.

Not only am I using the P/E as a filter, for example, GM doesn't pop up anymore, but I am also using it as a means to measure profit objective. I look at the historical sector P/E and calculate what the price should be relative to the earnings if the earnings are fortunate enough to stay the same. Historically, if earnings stay fairly consistent for GM, then it is pretty fairly valued.

EXPE has a current P/E of 145!!! LOL. So it's a tech stock with - ahem - prospects of rapid growth. Let's cut the P/E to 50 and consider that the E will stay fairly constant over the next 6-12 months. So, you've cut the P/E by 2/3, you cut the price by 2/3. That takes it down to 18. And look there, I just pulled up the weekly chart and in early Q2 there is a gap at 18.

Now where do you think EXPE is going to go? I know you didn't need me to do the math daniel. I was just demonstrating my thought process. When will I get in? Well you already know that.

Oh yeah risk reward. I use the ma as the pivot. The risk is the other side of the ma. That's it. That's what I meant by, they never looked back. I get in at the close if it closes across the ma. GM closed below and I shorted at the close of that day. It never looked back. Sometimes the price will cross over and close on the other side. So I reverse because I don't know that it isn't go to go that way for awhile. Hence my signature. I think AMGN is a goo short coming up. I shorted it once, was wrong and reversed across the ma. Now I'm up 4-5 points. I still think there is a good short coming. But I'll take 3-4 points on the "wrong side" if it's there.

So no, I don't believe big reward requires big risk. If you set your chart to line chart, you will see that when price crosses the moving average, it tends to continue in that direction. Sometimes it crosses back and forth. But on line chart, you will see that the number of times is nowhere near what people would have you believe. I'll risk getting whipsawed for 3-4 points to make 10 or 20, how about you?


:)
 
One reason many stocks trade at high P/Es is because the stocks are trading at around, or at a discount to the net assets of the company. A lot of Blue Chip stocks may not be making much money, but still have huge asset value, i.e. property, equipment, patents etc.

When you buy the stock you buy the assets and get the company for free so to speak. If you short such a stock and it starts to turn the corner and make money, you could get creamed.

So P/Es alone are only half your filter.

Runningbear
 
I know someone who has owned Cisco from the IPO and his cost basis is .17cents per share (adjusted for splits). When they went public their PE was 200 times and has never been less than 30 and was mostly above 50. So would you short it!
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CSCO wouldn't make the cut for a short as it has no LT debt.
 
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