Today marks the day-versary of my blog.
Ok, I ll start to share on fundamental analysis.
Before that, just to let you guys know that this blog layout and template is really going to be temporary and I shall improve it over time. I decide to focus on writing, and I ll improve it when good webpage design ideas come along the way.
Let me start with one of the most popular ratios in fundamental analysis – the PE Ratio.
Some call it PER, PE Ratio, price multiples, earning multiples etc but they all mean the same thing.
PE stands for Price to Earnings Ratio
It is the ratio of market price of the share divided by Earnings per Share, or simply
So what does it mean?
For example, lets take Wells Fargo & Co. NYSE :WFC . It’s one of stocks in Warren Buffet’s portfolio. It is currently having a PE of 11.7 . It means that you will be paying at $11.70 per $1.00 of earnings per year.
Sounds complicated huh?
Currently Wells Fargo & Co is trading at a price of $45.65. It has a PE of 11.7, which means the earnings per share (EPS) should be $3.90/yr. So if you were to invest at this price, typically you should own the share for free in 11.7 years time.
Typically again, the lower the PE the better it is. A lower PE means you are paying less per dollar of earnings per year.
What is a good PE or a good gauge?
The PE of Straits Times Index (STI) , which is a basket of 30 blue chips stocks in Singapore , is currently trading about 12.77; whereas PE of Dow Jones Industrial Average (DJIA) is about 14.22 and PE of FTSE Bursa Malaysia KLCI Index is trailing at 17.34. These are countries’ stock market indices, which are good gauges of the performance of the countries’ stocks in general.
So I’ll favour stocks with PE of about 10 to 15.
Hence should I just scan for stocks with very low PE invest in them?
Of course investing can’t be that simple. You’ve probably heard of many people who burnt their fingers.How I wish it can be that easy.
(1) Future Profit Guidance. If analysts or investor forecasts that the earnings for the next quarter or subsequent few will be gloomy, the stock will be beaten down or sell down to a lower PE, though the current quarter earnings is impressive. Do note that earnings per share changes per quarter .Hence you get PE of say 5-6, and anticipating earnings to drop to half of previous quarter, it will drop to 10-12 next quarter.
(2) S-Chips. If you do some stock screening to hunt for the lowest PE, you will end up some shares having PE of 1 or 2 or 3. These are most likely S-Chips, which are China Stocks listed in Singapore Exchange. They are selling at very cheap earning multiples because there had been cases of S-chips scandals, where they reported more cash or earnings than they really had. A recent and famous example would be Eratat Lifestyle F08:SI . They reported more cash than they had and yet defaulted on the bonds coupon payment.
(3) Cyclicals. Certain companies’ stocks are cyclical in nature. For instance semiconductor providers like StatsChippac or Fashion Retailers like FJ Benjamin. They tend to do well when the economy is good because they are selling luxury goods and people spend more during good times, hence better earnings. In bad times, they usually sell at very high PE ratios or no PE due to poor earnings.(No PE means it suffered a loss or no earnings) If we believe that such companies will make a turnaround as economy improves, it can be a wise decision to buy it cheap now and wait for a comeback. However, much patience is needed. I will cover more on cyclical in future.
Do remember that the PE of the stock changes with the stock price as well as the earnings per share.
Ok, thanks for reading and that’s all for today.
If there’s any queries or anything you wanna ask about stocks , drop me an email : [email protected].
Thanks for reading! 🙂