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STOCK PE AND VALUE UPDATE MAY 31 2025
CAN YOUR STOCK GUSH PROFITS?
When investors hear about how expensive stocks are, some might think it refers to a high stock price. For example, if someone compares a stock that costs a buck a share, and then looks at a stock that has a $900 price tag, they may think the $900 stock is more expensive.
On one hand, they would be right if it pertained to how we shop for most things.
After all, if we see a dress priced at $20 bucks and one priced at $2,000, in a certain sense, the $2,000 dress is indeed more expensive.
But what if the $20 dress is made from cotton and the $2,000 dress is made from gold thread and has $5,000 worth of diamonds on it?
The $2,000 dress with $5,000 worth of diamonds and woven in gold thread certainly is a better value as for $2000 you are getting over $5,000 worth of diamonds plus the gold thread and hence, could be said to be a better value than the $20 dress.
The same can be said about the comparative price of stocks.
Many investors may only look at the price of a stock when deciding what to buy instead of looking for the better “value”.
Although there are many intangibles and ways to evaluate the value of a stock, the most basic method that almost any investor can use is what is called the “Price to earnings ratio” (PE).
The PE is a common published figure on almost all stock screeners and it represents how much you are paying in company earnings per each share of stock you buy.
The PE is calculated by dividing the price of a share of the stock by the earnings per share.
For example, if a stock is priced at ten dollars and the company annually earns one dollar per share, then $10 (price per share) divided by $1 (earnings per share), the PE ratio for this stock is 10.
If the company earned $2 per share, then $10 divided by $2 is 5.
Now suppose you were looking at buying a grocery store and between the two stores you were looking at, grocery store A had two owners and earned two bucks a year. Each owner would get one buck a year in earnings. Its PE would be 5. (10 divided by 2).
Grocery store B also had two owners but earned only one buck a year. Each owner would get .50 cents a year. Its PE is 10. (10 divided by 1)
If both stores were priced for sale at the same price, Grocery store A, having a lower PE, would be the better value as each owner gets more money per year than grocery store B, which subsequently has a higher PE.
The PE therefore tells you what company is costing you more as it pertains to earnings. The higher the PE, the more expensive the stock relative to another with a lower PE.
This simplistic mindset can be one of many considerations an investor can look at when deciding what stock might be a better value.
Seasoned investors know that there are many more metrics one can look at when considering what stock to buy
Of course, a knowledgeable financial professional can always assist you when wading through a company’s financial vitals, but understanding even a small amount of how to evaluate a stock can begin to open the eyes of even the most beginning of investors.
After all, what is more simplistic in deciding what company to invest in then just seeing which company makes more money?
Although comparing PE is only one of many metrics that should be used, and its best to only consider companies in the same industry when using the PE comparison methodology, this common sense approach can start the mom and pop investor down the road of knowing a little bit more about the world of investing.
Education is the cornerstone of progress, and when it comes to your money, the more knowledge you have, the better you and your money will be.
“Watching the markets so you don’t have to”
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(As mentioned please use the below disclaimer exactly) THANKS (Regulations)
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249 His insurance agency is BAP INC. insurance services. Email: news@moneymanagementradio.com
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