The relevance of P/E

Sonnenblumen

Just looking at the ISEQ and cannot help wondering why so many (major) stocks are heading south despite having a modest P/E < 12.00, whereas there are others with a P/E > 20, still heading north.

Good examples of the former are AIB but C&C for example with a P/E of 27 (unbelieveable) has racked up 40% YTD. I mean all the C&C talk these days is about Magniers 1% share of the London cider market, I mean for Christ sake, where's the relevance of P/E here?

Am I missing something there are other glaring examples of high P/E's, no divis and yet still heading northwards whilst substantive stocks are battered?

Black Swan

Although often used as an indicator of financial performance, P/E is not reliable and can be misleading. For example, management can lay off (reduce the workforce), cut research expenses, reduce marketing, etc., because the corporation is failing, and in the short run the P/E may appear to improve. A better indicator is cashflow. And multiple indicators are better than any one indicator.

Read a book about Warren Buffett, one of the most successful investors in history. You might want to check him out? He's been in the news lately. He believes in only holding a very small number of stocks in his portfolio. About ten or less. Why? Because he says that in order to truly know a corporation you have to study it in depth, and you don't have time to study in depth a host of them. Oh, one of his favourite indicators is debt. Is debt increasing, staying constant, or decreasing? He typically avoids those corporations that are increasing debt.

I am learning as much as I can about equities and starting to invest more, as savings accounts operate poorly in terms of the time value of money.

dunkamania

P/E ratios fail to take into account the future value of growth oppurtunities.

Sometimes companies have low P/E ratios because they are expected to perform poorly in the future.

Sonnenblumen

dunkamania wrote:

P/E ratios fail to take into account the future value of growth oppurtunities.

Sometimes companies have low P/E ratios because they are expected to perform poorly in the future.

Low P/E's with poor performance is a no brainer. The Q is how come, good performers (record revs, record breaking profits ) like AIB, Anglo, BoI etc etc are losing ground whilst newcomers like C&C with a P/E of 27+, combined with an average performance and also tiny(value wise) in comparison to the fin stocks, and despite selling off assets can rack up + 40% YTD on SP!
The only positive news I see on C&C is this extraordinary sunny spell, and OK bigger demand for a few more pints here and in London bars but surely there's more behind the P/E and or current SP?

I'm missing something but I also need a drink?

There are other stocks with high P/E's, paying non divis, and yet there's good movement in SP. They're more volatile and swings can be savage(+/-), not for the fainthearted.

dunkamania

Sonnenblumen wrote:

Low P/E's with poor performance is a no brainer. The Q is how come, good performers (record revs, record breaking profits ) like AIB, Anglo, BoI etc etc are losing ground whilst newcomers like C&C with a P/E of 27+, combined with an average performance and also tiny(value wise) in comparison to the fin stocks, and despite selling off assets can rack up + 40% YTD on SP!

A,higher relative present value of growth oppurtunities,or market mispricing

stepbar

You need to take an industry by industry view and get a average P/E ratio for all the companies in that industry. If you notice a company with a P/E lower then the average then that can warrent further investigation. Look for indicators such as ROE, Dividend per Share, Profit (no brainer) the sort of assets the company has / the balance sheet in general and finally director shareholdings (collectively compared to other institutional investors). High = confidence, Low = lack of.. O and also you have to get a feel for how the market rates the stock, this can be done by looking at stockbroker reports, business news in general and fluctuations in shareholdership. Generally all this is reflected in the share price but not always.