crane siding fox lake siding replacement siding calculator hardie board siding harvard crane siding round lake beach .. Chicago Drug testing

Dont Buy Stocks based on P/E Ratio alone

I use the P/E ratio as a secondary indicator for buying and selling stocks but I don't use the ratio in the same a manner as many value investors teach. I will explain the difference in my methodology for using the P/E ratio to your advantage.

Many value investors will pass on a growth stock that has a P/E ratio higher than a predetermined level. For example, they may discard all stocks that have a ratio of 15 or higher, no matter what industry group they come from. Some investors will discard any stocks that have P/E ratios above the industry group averages, concluding that they are grossly overvalued. I am not saying that this method doesn't work, because it does but it will not work when you focus on buying young innovative small cap stocks that are growing at tremendous rates, rates that "big caps" can no longer sustain.

I have never passed on buying a stock due to its P/E ratio being too high. What is too high? Too high to one investor may be low to another investor. This is the same logic that I use when speaking of stock's prices. One problem that have with some value investors is their lack of understanding of the movement of the P/E ratio line on a chart. As a stock begins to move 100% or 200% from its pivot point, the P/E ratio will also move higher over the course of time. Plotting the P/E ratio on a chart will show you how much of a gain the ratio has made as the stock continues its up-trend.

Value investors that pass on buying stocks with P/E ratio's above a certain threshold have missed some of the biggest winners of all time (the 10-baggers as Peter Lynch would say). Analysts frequently downgrade stocks when their P/E ratios cross what they believe to be fully valued thresholds.

Some things in life are worth more than other things although they offer the same use, such as a car. I tend to use this example often but I would rather own a Mercedes for $50k over a Pinto for $10k. They will both take me where I want to go but I value the amenities that the Mercedes gives me and the added comfort, quality and style that comes with the luxury vehicle. The same holds true for stocks, certain companies offer greater appeal and are valued at higher ratios than their competitors. The best materialistic things in life, including growth stocks, are usually bought at a premium.

The P-E ratio uses a stock's current price and divides it by total earnings per share over the past four quarters. For example, currently GDP has a P/E ratio 51.06 with a share price of $24.00. Its last four quarters of EPS add up to $0.47. Its P-E ratio is $24.00 divided by $0.47, or 51.06. MSN Money Central has the P/E ratio listed at 51.30.

Growth stocks usually sport higher P/E ratios than the rest of the general market, even at the start of up-trends. A high P/E ratio typically means that the stock is enjoying strong demand. If a stock climbs in price from 40 to 60, its P/E ratio also gains 50%. Even though the P/E ratio may be high according to some analysts and value investors, the stock may be about to breakout from a cup-with-handle and go on to double from this point. Would you want to miss out on a possible 100% gain because the P/E ratio is too high?

Investor's Business Daily conducted an excellent case study in 1996-97: "The 95 best small- and mid-cap stocks of 1996-97 had an average P-E of 39 at their pivot and 87 at the peak of their run-ups. The 25 best large caps of those years began with an average P-E of 20 and rose to 37. To get a piece of these big winners, you had to pay a premium."

When I purchase a stock, I note the current P/E ratio and chart it along with the price. Historically, P/E's that move up 100%-200% or more while the stock is advancing, usually become vulnerable stocks and can start to become extended and flash sell signals. It holds true for a stock with a P/E starting at 15 and going to 40 or a stock with a P/E of 50 and going to 115. Don't skip over EXCELLENT companies that are growing at amazing clips because of a high P/E ratio. What may seem high now, may be low later on! Earnings and Sales are much more important. Price and volume are the most important. The P/E ratio is just a secondary indicator that can be used to further analyze the stocks in your portfolio.

Always use price and volume as your first line of offense and defense. From this point, turn to some dependable secondary indicators to confirm your original analysis and then make a decision. I would never throw out a stock because its P/E ratio is too high. Take GOOG for example, every value investor missed the 100% gain that this stock boasted after the release of its IPO. Growth stocks are expensive for a reason, don't forget the analogy to a Mercedes.

Chris Perruna - http://www.marketstockwatch.com

Chris is the Founder and President of MarketStockWatch.com, an internet community that teaches you how to invest your money with solid rules. We don't stop at just showing you our daily and weekly screens, we teach you how to make your own screens through education. Through our philosophy, you will be able to create your own methods and styles to become successful.

In The News:

Ignore Stock Market Talking Heads

You should ignore analysts on TV, the radio, the newspaper... Read More

Hot Stock Trader: How to Pick Momentum Stocks with Ease and Simplicity

Most stock traders know that momentum trading can be a... Read More

Different Types of Mutual Funds

This is a guide to the different types of mutual... Read More

The Inside Scoop on Mutual Fund Rip Offs

The bear market that showed up at the end of... Read More

Economists

In today's volatile and confusing stock markets everyone is searching... Read More

Stocks & Oil, Sat Jun 18th, 2005

Both the stock market and oil prices rallied recently, which... Read More

Box Of Chocolates

Ever have one of those sample boxes of candy? Each... Read More

Different Ways of Buying Stocks

Let's say you are interested in this one company. You... Read More

Managing Investing and Stock Market Risks

Reduce your investing and stock market risks by:Setting your sights... Read More

Stock Market Investing Odds

The greatest stock market myth is the idea that investing... Read More

Market Timing?

The recent criminal fiasco in the mutual fund industry is... Read More

Index Fund Trading Using Technical Analysis and Swing Trading Strategies

Index Fund Trading can be one of the most profitable...or... Read More

Size Counts!

What the heck am I talking about?It is often said... Read More

Online Trading Strategy: Collecting Cash when Stocks Go UP - It PAYS to Know More than Others

When it comes to stock market trading it PAYS to... Read More

Protect Your 401K

Checked your 401K lately? Going back to about a year... Read More

Stock Loans

Hedge current portfolio positions and gain access to capital resources... Read More

Maximizing a Stock Market Investment

Maximizing a stock market investmentThere are several factors an investor... Read More

Making a Stock Watch List

I am taking the time to help others learn the... Read More

Economists #2

Economists know more about how the fragments of society work... Read More

Advisory Service for You?

It depends on your level of understanding of the market... Read More

Look Out The Window

Quick, look out the window. It's raining. No, the sun's... Read More

Advisory News Letters

Several times each month I am solicited by various market... Read More

Investing in the Stock Market

From the book 'The Stockopoly Plan' by the author Charles... Read More

10 Tips For Creating Wealth From the Stock Market

1. Do not spread your money too thin.My friend has... Read More

Investment Clubs

Because you don't feel too sure about which stock or... Read More

high power led street lighting street light instrumental Pete's produce ..
high power led street lighting street light instrumental Pete's produce ..