Happy hump day all.  Wanted to share an interesting article from Forbes (thanks Dad for sharing).  The author spends the article evaluating based on their Price to Earnings (P/E) ratios.

Quick refresh, a P/E ratio is the price of the stock (i.e. a share of Apple costs $544 today) divided by the annual earnings (net income) of the stock.  In theory a low P/E ratio means you get more “bang for your buck” because you get more earnings for less cost.  It’s a way of valuing stocks on a relative basis, since you can’t just compare stock prices.

He provides some examples of stocks that are still cheap in the market based on their P/E ratios.  His standout is Apple, which trades at 14 times earnings.  The $12,000 comment is that if Apple had the same multiple as Netflix (300) it would be a $12,000 stock (i.e. $544 x 300).

I want to add on to his article though. While a P/E ratio is a good thing to check when investing, it should in no way be the only thing you test (which his article kind of implies).  Stocks can have high P/E multiples and still be valuable.  If investors believe the stock has a lot of growth potential the P/E ratio will be a lot higher, because price is being compared to future, not current earnings.  If you’re looking fora growth stock, P/Es above 100 are not uncommon at all.

That being said, when a stock’s s P/E multiples just defy every law of common sense, i.e. Twitter, I avoid them no matter how much growth investors think they have.  Twitter should not be trading at twice the multiple of Facebook, when Twitter makes NEGATIVE money right now.

Finally, I leave you with the author’s fantastic Forbes picture.  This cartoon treatment is legit.

0822_forbes-columnist-buckingham_400x401-300x3001

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2 Comments on Article Share: Is Apple Worth $12,000 A Share?

  1. Jeff
    January 9, 2014 at 6:15 pm (3 years ago)

    This reminds me of two factoids I learned back when I took time series econometrics:

    1) P/E’s are decent correlational indicators of value at ~5-10 years (Shiller).

    2) My own undergrad research, inspired by Shiller, has shown that 1, 5, and 10 year P/E ratios (for the S&P 500) do not Granger-Cause market returns over 5, 10, or 30 year intervals. However, this has been contested and may not necessarily apply to individual corporations! Food for thought.

    The best part of this post is the cartoon!

    Reply
  2. The Day Tradette
    January 9, 2014 at 9:59 pm (3 years ago)

    Thanks for the comment, exactly the point I was trying to make. How much a P/E ratio matters in an investment will vary widely based on why you’re investing. I.e. I look at short-term investments, so they don’t matter as much as someone looking to hold for 5 years.

    And yes, would love to figure out how to get one of those for myself 🙂

    Reply

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