Low EP doesn't mean cheap

Braveheart

EP ratios are used to compare various stocks on a standard measure.  If one stock trades at $50 and another trades at $2, you cannpt say the $50 stock is more expensive.  You must see what earnings you will get for that $50.  If the $50 stock has $5 of EPS, and the $20 stock has $.20 EPS, they both have a PE of 10 and you can say that they are similarly priced.

Not all stock should trade at the same PE multiple.  Higher quality companies with better managements, better growth prospects and less risk will trade at a higher PE than smaller, risker companies with fewer growth prospects and poor managements.

PE ratios are snapshots of a current year's earnings, or, at best, next year's earnings, and say nothing about earnings growth in the future.  You may very well agree to pay a high PE for a stock that is watching its earning grow rapidly over time.

Buying a poorly performing company in a decling industry is not a good idea, regardless of the low PE.  The PE may be calculated on last year's earning and the future may bring fewer earnings and possible bankruptcy.

If you go in search of low PE stocks, considering them bargains, you will populate your portfolio with many troubled companies.  That's why they are trading cheap on a PE basis.

Same with dividen, today's high dividen doesn't mean a high dividen tomorrow.

bryanlie

good point

summer123

If the $50 stock has $5 of EPS, and the $20 stock has $.20 EPS, they both have a PE of 10 and you can say that they are similarly priced.?

Braveheart

If the $50 stock has $5 of EPS, and the $20 stock has $.20 EPS, they both have a PE of 10 and you can say that they are similarly priced.?
summer123 发表于 2010-1-13 17:54

should be $2 not $20