Comments on: Is P/E ratio a useful stock valuation measure?

By: investment-scientist

investment-scientist — Sat, 25 Jul 2009 08:27:11 +0000

Alberg,

I’ve never used P/E alone in stock picking. A low P/E stock may not have better returns than a high P/E stock. However, a low P/E portfolio will more likely (but not always) outperforms a high P/E portfolio. Because of that, I have a value biased in my portfolio composition. For example, I have small cap value instead of small cap growth.

By: alberg

alberg — Wed, 22 Jul 2009 14:08:42 +0000

I’ve done a lot of analysis on the difference between fundamental and technical analysis, including market timing (but not looking at day trading timing, for instance). Here’s an example… maybe a sample of one is not valid, but take Microsoft as one that everyone knows. MSFT’s PE ratio has been as high as 44 and as low as 8.65 over the last 5 years. However, it’s stock has been terrible in relationship to shareholder value, when compared with Apple over that period of time, and I don’t think that buying when the PE ratio was low was any better returns than when high. Only in the last three months has the stock been a ‘value’ and it took a major crash for that to happen. Thoughts?

By: investment-scientist

investment-scientist — Mon, 20 Jul 2009 22:16:14 +0000

Alberg,

I can tell you the result is robust to “timing”. In other words, if I pick the rebalance day on any day in a year, the result will be the same.

By: alberg

alberg — Mon, 20 Jul 2009 16:20:51 +0000

Interesting analysis. Thanks. However,I would question whether timing of the markets play any role in the analysis. Your ‘timing’ model basically states that if you bought every January 2nd (or whatever opening day), and sold on the last day of December, that your PE model would be this way. That theory is not how people usually buy stocks. I’m not questioning the notion that P/E is useful, but people obviously panicked last year and early this year and bailed out, after probably buying in during 2005/2006/2007. Would P/E have made a difference there? If a person bought this group of stocks at the highs in those years, and sold in the crash, or after the .com bubble burst, what would the split in P/E ratios be? Would it have affected the rate of returns for times when people actually sell heavily?

By: investment-scientist

investment-scientist — Wed, 25 Mar 2009 11:39:41 +0000

Okonkwo,

The answer is yes. Regardless of what valuation measure you use, P/E, P/B, P/S or P/C, the result is the same: value outperforms growth over the long run but not every year.

Note: P/S is price to sales and P/C is price to cashflow.

Caution: One commonly used valuation measure that does not work is PEG, since the “G” part (growth rate) is subjective. and tend to reflect investors’ illusion more than anything else.

By: Okonkwo Joseph

Okonkwo Joseph — Tue, 24 Mar 2009 22:34:58 +0000

I must say that I really enjoy reading your site.But this particuar article,is that to say that value stocks outperforms growth stocks