classes-to-go what is a p/e ratio and why should i care? allen holdsworth illowa buy states chapter...
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Classes-To-Go
What is a P/E Ratioand Why Should I Care?
Allen HoldsworthIllowa Buy States Chapter
BIVA Board Director
BETTERINVESTING NATIONAL CONVENTION
Disclaimer• The information in this presentation is for educational purposes only and is not
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Understanding P/E Ratios
• Presented by:• Allen Holdsworth• Illowa Buy States Chapter-
Director• BIVA Board-Director• Teach 16 week Personal
Investing class at community college
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What is a P/E Ratio?
• It is NOT gym class• No need to get all sweaty• You can figure out P/E ratios
even if you can’t walk and chew gum at the same time!
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What is the P/E Ratio?
• The P/E ratio is the price per share of stock divided by the earnings per share of stock
• The question is - which earnings are used?
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Understanding P/E Ratios
• P/E Ratio means:• Price per share divided by the
earnings per share from the last 4 quarters
• This is the trailing P/E• Price changes every day• Earnings per share only changes
each quarter
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Understanding P/E Ratios
• Value Line uses current P/E--Use the last 2 quarters plus the next 2 quarters in the future
• Future P/E uses the projected earnings over some future time period
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P/E Ratios
• The P/E ratio is the amount of money someone is willing to pay to get $1 of earnings
• It could be considered a popularity contest
• In general - the faster a company is growing, the higher the P/E it will have
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P/E Ratios
• What makes the P/E change?• The future growth prospects are
the driving force in price and P/E
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P/E Ratios
• What is a good P/E or a bad P/E• Is a P/E of 20 good or bad?• It depends!!!!
– Look at past history of P/E ratios– Look at other companies in same
industry– Look at average P/E for S&P 500– Look at the prospects for the
company
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P/E Ratios
• In general, the faster a company grows - the higher the P/E ratio
• As the growth of a company slows over time - the P/E ratios will usually come down
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P/E Ratios
• Different types of industries tend to have different P/Es - even if the growth rates are similar
• Part 3 of the Stock Selection Guide helps us determine the normal range of high and low P/E
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P/E Ratios- Pulte Homes
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P/E Ratios-BUD
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P/E Ratios- BBBY
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Section 3- Apple Computer
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XM-How do you make an estimate?
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P/E Ratios in Section 3
• Eliminate outliers - can see the last 10 years of P/Es on Toolkit- click on avg. high or avg. low P/E box in Section 3
• P/E expanding - use average• P/E shrinking - use most recent or
even lower• Max. high P/E of 30 (1.5 times growth
rate or sometimes 2 times growth rate)
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P/E Ratios
• Don’t buy a stock just because the P/E ratio is low
• Do more research - try to discover why it is low
• There may be bad news and it deserves to be low
• The future growth prospects are the real driving force
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P/E Ratios
• There are 7 basic ways a company can increase earnings– Reduce costs– Raise prices– Open more stores/expand– Sell more in existing markets– Fix or sell losing operations– Buy back shares– Lower taxes paid
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Understanding P/E Ratios
• References: from BetterInvesting:– Stock Selection Handbook– Using Portfolio Management
Wisdom
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