Tag Archives: Price–earnings ratio

by | November 22, 2013 · 2:25 pm

Price to sales ratio (P/S)

When you evaluate companies, you have many tools to use. You can do the research by looking at the numbers in companies that have made money in the past. The tools I have been written about earlier is very useful.

But what if a company don`t have any earnings? Is it a bad investment? Not necessarily, but you should be very careful with companies with no income history.

The tech bubble is a good example. Many companies didn`t have earnings history and some of them didn`t have products either. That was the 90`s. Fortunately. However, sometimes you find a great company that is worthy of consideration. Therefore, you need to measure the young companies without the earnings.

You can calculate like this:

P/S = Market Cap / Revenues
or
P/S = Stock Price / Sales Price Per Share

Price to Sales (P/S) ratio is a tool you can use and the lower the P/S the better the investment is because you are paying less for each unit of sales. However, sales do not reflect the whole picture as the company may be unprofitabel with a low P/S ratio. This ratio is usually used only for unprofitable companies. That is because they don`t have a price-earnings ratio (P/E).

Like the other tools I have been writing about, you shouldn`t use only one of them to determine your investments. Especially, when you are dealing with young companies, you will have a lot of questions to answer and the P/S ratio is only one of them. Remember; Microsoft was without earnings at the beginning of their carreer.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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by | November 20, 2013 · 1:35 pm

Price-to-earnings growth (PEG)

PEG ratio is used to determine the value of the stock while you look at the company’s earnings growth. This gives you a better picture and overview than P/E ratio. Take a look at LinkedIn. Price-to-earnings is just below 1000 now.

A high P/E like that may look like a good buy, but factoring in the company`s growth rate to get the stock`s PEG may tell you another story. A company with a lower PEG ratio may be undervalued given its earnings performance.

The PEG ratio tells you whether the stock is over or underpriced and that varies by industry and what kind of business it is. The accuracy of the numbers in the PEG depends on all the inputs used. If you use historical growth rates, you may provide an inaccurate PEG ratio because the future growth can deviate from historical growth rates. Some use the terms “forward PEG” and some use the terms “trailing PEG” to distinguish between the calculation methods using future growth and historical growth.

The most popular way to compare two different stocks are to look at the P/E. You simply calculate it by taking the current price of the stock and divide it by the EPS. It tells you whether the stock is high or low relative to its earnings.

A stock with a high P/E is often considered as overpriced and that is probably right. It signals that the traders have pushed the stock price too high and above any reasonable near term growth that is probable.

However, a high P/E can also signal a strong vote of confidence that the company still has strong growth prospects in the future. This tells us that the stock price can go even higher.

Investors are usually more concerned about the future than the present. That`s why it is better to look at future earnings growth or the PEG ratio. You calculate the PEG by taking the P/E and dividing it by the projected growth in earnings.

PEG = P/E ratio / (projected growth in earnings)

For example:

P/E in Company A is 100, and projected earnings growth next year is 20%. PEG in this case is 5 (100 / 20 = 5). Like all other ratios, the number five in this case is just a number you can compare in relationship to others. The lower the number, the less you pay for each unit of future earnings growth. A company with a high P/E and a high projected earnings growth may be a good value.

A company that is not growing any more with a P/E of 10, and a low or no projected earnings growth, gives you a PEG like the P/E. This can tell you that the investment in here is very expensive.

Take a look at the chart below. I have compared Sony with Starbucks. People are not buying vinyl records or cd`s anymore. What do they buy? They simply buy coffee! Sony traded at $120 in year 2000, and now the stock is just below $20. By the way, do you know what company that is selling most cd`s in this world right now? Belive it or not; it is Starbucks!

SNE and SBUX

News today:

Core CPI & Retail Sales at 8:30am,

Existing Home Sales & Business Inventories at 10:00am,

Crude Oil Inventories at 10:30am,

Fed Meeting Minutes at 2:00pm.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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by | November 14, 2013 · 1:57 pm

Price to earnings 2

Margin of safety is very important. It seems to be like that the human psychology is apt to go too far sometimes and it can all end up to throw rational valuation out of the window.

You know that price-to-earnings for Facebook is 12, and 13 for Twitter, and if you are paying more than 15 times the earnings for a company, you need to seriously examine the underlying assumptions you have for the companies profit in the future, and its intrinsic value.

I have seen many stocks trading with much more than 12 and 13x earnings, and if you have bought some of them at that price you would have crushed other investments because the underlying prifits did live up to Wall Streets expectations.

But who is investing in a risky business if they don`t know the business they are in? Do you feel confortable if you have all your money in a risky stock like that if you don`t know the demand, competitors, future drivers and the commodity nature of their product? The company can be wiped out, so does your money, but probably not.

The ideal situation is when you get a great business out of your investments and generates huge amount of money with little capital investments. Sometimes you get a huge profit at a steep discount to intrinsic value. How about Wells Fargo, trading at 5x earnings during the real estate crash 23 year ago?

You have to predict the future and try to imagine how the future will be for the company. How is it today, tomorrow, next year and how does it look in 10 years? Is this business going to grow? Will it be a huge demand for their products? Are they competetive? What about their earnings and profit in the future? Is there any threats?

I know a great company. They are selling cd`s and vinyl records. Everybody knows about the company and the price is low. Are you willing to buy shares in this company? Of course not. Selling vinyl and cd`s is not the future and you know that. The future is streaming and broadband. That is where you are going to spend your money.

It is wise to require a much larger margin of safety before you buy some shares in enterprises. The right definition of ‘Price-Earnings Ratio – P/E Ratio is; A valuation ratio of a company’s current share price compared to its per-share earnings. It is calculated like this:

Let`s say company A is currently trading at $50 a share and earnings (EPS) over the last 12 months were $1,95 per share. Then the P/E ratio for the stock should be 25,6. ($50/$1,95). That`s it. Remember that the average market P/E ratio is 20 – 25 times earnings.

EPS (earnings per share) is taken from the last four quarters (trailing P/E). Sometimes the numbers is taken from the estimates for the next four quarters (projected or forward P/E). Other use the last two actual quarters and the estimates of the next two quarters. Often known as “price multiple” or “earnings multiple”.

It will be wrong to compare price-to-earnings in a technology company (high P/E) to a utility company (usually low P/E) as they have a different growth prospects. P/E tells us how much investors are willing to pay per dollar of earnings. P/E for Facebook is 12, which means that the investors is willing to pay $12 for $1 of current earnings.

Avoid basing a decision on this measure alone, because this numbers is usually not enough. the earnings is based on an accounting measure of earnings that is susceptible to forms of manipulation. It makes the quality of the P/E only as good as the quality of the underlying earnings number. Keep in mind that companies that are losing money do not have a P/E ratio.

News today: Trade Balance & Unemployment Claims at 8:30am, Fed Chairperson Yellen Testifies at 10:00am, 30 Year Auction at 1:01pm.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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by | November 13, 2013 · 1:53 pm

Price to earnings 1

I always look for values, and I tend to be an value investor. That`s why I have been written about Twitter and their IPO share price lately. That doesn`t mean I always look for a low price-to-earnings ratio stocks. I think that is a mistake many investors do when they are investing.

This approach has generated above the average returns over a long periode of time, but it is not the ideal solution to find the right stock. Twitter was trading down -2,33% yesterday, closing at a share price of 41,9. Value investors are selling at the moment. What is the value?

I look for the intrinsic value of all the assets in a company. The important thing is the cash flows that will be generated by that asset discounted back to the present moment at a rate that factors in opportunity cost and infation. You can measure the opportunity cost against the risk-free U.S Treasury.

Different companies deserve different valuations. That is how you understand the intrinsic value. It is difficult to try to figure out how to use this for individual stocks. It depends on the economics, the nature and what business the company are operating in.

You have many different businesses out there. You only need a computer to start a new web building company. Starting a new steel mill requires tens of thousands of dollars in startup capital. What a difference?

The web builder deserve a higher price to earnings multiple because the shareholders doesnt need to spend more money to maintain the property and other equipments. This is why intelligent investors distinguish between the net income figure and true and “economic” profit (Warren Buffet call it: “owner” earnings).

This represent the amount of cash they can spend on other investments by reinvesting it.

Reported net income is not the most important thing, but how many computers the owner can buy relative to his investment is more interesting.

The investors net worth is limited to the return on aquity generated by the underlying company. On the other side; you can hope for another “fool” to buy your share for a higher price or a great bull market, but that is very speculative and seems to be very risky.

As you can see, two different businesses might have identical earnings of $10 million, but Company A may gererate about $5 million and company B, $20 million in “owner earnings”, which means company B can have a price-to-earnings ratio that is four times higher than company A yet still be trading at the same value.

News today: FED chairman Ben Bernanke speaks at 7pm.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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by | October 17, 2013 · 11:36 am

Bullish Bullish Bullish

It`s optimism in Asia, and all the indices are up. All this of course because of the good news we all got from the Capitol Hill yesterday. They came to an agreement only two hours before the deadline, and now the can rise the limit and borrow more money.

The shutdown is also over and one million people can get back to work again. The agreement is only for a short periode of time. Desember 13 is the next date for a new agreement. That is for an agreement in a long run.

Stocks went up in the US after the good news and gold is up too. VIX is down 21,17%. Many hedgefunds have lost a lot of money yesterday. Right now gold is trading at $1306,10. So, what am I suppose to do now, you said? Well, as I have told you before, in the US, the P/E (price/earnings) is 20, which means Europe is a better bet, because P/E in Europe is 10.

Where do you find the bullish stocks, and when are you getting in, and when are you getting out. Many have asked me about that, and this is the point where many are struggling. Let`s look at the chart for Microsoft and Apple.

Msft and Aapl

If you bought those two stocks in the 80`s, you would have a huge gain today. But who is sitting on their stocks for 30 years? If you bought Microsoft in 2000, you would have lost your money today. If you bought Apple 10 years ago you would have a huge gain today. When to go in and out of a stock is sometimes difficult.

Many investors tend to remember the losing trades much better than the winning trades. It`s all about feelings when it comes to invest money. If you lose money you can get so nervous that it will be impossible to make good decisions again. The mere thought of losing money blocks the opportunity you have in the market.

Controlling emotions is very important when you are investing money in the market, because emotions can play havoc with your investing. That`s why you need to have a plan that makes you prepared no matter what happens in the market.

Emotional investors usually do wrong decisions and there is many of them. If you are one of them, it doesn`t mean you can be a successful investor. It simply means you have to acknowledge your concerns.

First of all you need a plan. Before you buy stocks you need to have a selling plan. You have to decide at what point you want to sell the stock. Stocks goes up and down, and you need to consider how low you think the stock might fall. Professional investors do always set a “stop loss”.

How much money can you affort to lose? 10%? 20? More? You must find your exit strategy. With a plan in your hand you can take away your emotions, and better understand when to avoid holding the stock too long or when to selling the stock to early.

You do not want to lose money. Nobody does that. If you want to buy and hold, and sit on the stock for a long time, you don`t want to exit out prematurely, but you do not want to see a great gain disappear either if a stock begins a sustained downward plunge.

The pros often use trailing stops and stop loss orders. These strategy will help you to protect your investments against losses. These strategies will not give you a guarantee to profit or protect you against an absolute losses, but it will help you to control your emotions to make betters decisions, which means better investments over time, so stick to your plan.

A Price to book ratio (P/B ratio) is used to compare a stock`s market value to its book value. It is calculated by dividing the current slosing price of the stock by the latest quarter`s book value per share, also known as the «price-equity ratio».

A stock is undervalued if the P/B is very low. But it can also be a warning that it is something wrong with the company. This ratio also gives you an idea of whether you`re paying too much for what would be left if the company is bankrupt tomorrow.

If you look at all the companies and shares in S&P 500, you will also find a P/B for that index. A very useful technique that tells you how cheap or expensive the stocks are right now. Take a look at the chart I have added today. This chart will give you a picture of the situation a the moment.

PB value

Current S&P 500 Price to Book Value: 2,53 +0,03 (1,38%)

Wed Oct 16

Mean: 2.75
Median: 2.73
Min: 1.78 (Mar 2009)
Max: 5.06 (Mar 2000)

Current price to book ratio is estimated based on current market price and S&P 500 book value as of June 2013 — the latest reported by S&P.

News for today: Unemployment Claims at 8:30am, Philly Fed Manufacturing Index at 10:00am.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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