Let's learn #fundamentalanalysis for #longterm investing 📚🍎
Price-to-earnings ratio
What is it? How do you use it? And how does it create a picture of the valuation of the overall market?
"The price-to-earnings (P/E) ratio relates a company's share price to its earnings per share (EPS).
A high P/E ratio could mean that a company's stock is overvalued, or else that investors are expecting high growth rates in the future.
Companies that have no earnings or that are losing money do not have a P/E ratio because there is nothing to put in the denominator" -Investopedia
https://www.investopedia.com/terms/p/price-earningsratio.asp
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The picture I have attached is from finviz.com. I like to use their maps to give me a picture of the overall market and how different sectors are behaving.
This particular map shows the P/E ratio for each stock in the S&P500.
All of the red stocks have a high P/E ratio which indicates the overall market is overvalued. Yikes.
But, a P/E ratio only shows one piece of the picture. If you decided not to invest in any stocks because they were all overvalued... well you wouldn't have many stocks to pick from. Some sectors have higher P/E ratios... like technology for example.
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So here is the current P/E ratio for each sector (as of 12/12/21):
Basic Materials - 11.96
Financials - 12.83
Energy - 16.81
Utilities - 25.40
Consumer Defensive - 26.33
Industrials - 27.38
Communication Services - 28.57
Healthcare - 29.36
Consumer Cyclical - 32.43
Real Estate - 37.20
Technology - 38.04
The current P/E ratio for the entire S&P500 is 29.68. The average long-term P/E ratio of the entire S&P is around 16x. The highest P/E recorded since 1917 is 123x (in 2009).
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So what can you do with this information? When researching a stock, some people like to compare a stock's P/E to its sector or the overall market. Keep in mind P/E is not helpful in determining the value of a high-growth company because they usually haven't turned a profit. Again, P/E is just one tool in a giant toolbox.
A lot of experts think that we will see a reversal of growth stocks to value stocks. Which would be an educated guess. In times of inflation, investors look to cash flow and valuation… and that tends to hurt growth stocks. Dividend stocks like $PG and $ABBV are at all time highs. But just because a stock has a low P/E does not guarantee it will take off. Just because a stock has a high P/E does not guarantee it’s a bad investment.
As for how you interpret the market as a whole... that's up to you to interpret. We all have different strategies and that's okay.
But, I think that's important to know things like this when picking stocks. @tcardizzle has a great post where he discusses the Buffett indicator, P/E ratio, and mean reversion. You can read it here https://public.com/posts/QfiSMA0ySIkRQB49y29piFcKhM4OxbyJ
I'm a long-term investor so while the short-term is looking like a rollercoaster... I’m cautious but not panicking. I'm in it for the long haul. With 2022 around the corner, I think I am going to ditch some losers... keep holding onto my long-term stocks no matter what... and switch my focus to sector ETFs and you guessed it.
...Index funds $VOO $VTI $QQQM
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Why try to pretend I'm a stock genius (news flash... I'm not) when I could just pick a basket of the top traded companies? Almost all of my retirement accounts are split between those 3 index funds and the rest are split between dividend stocks and REITs. Sounds boring... but having a diversified portfolio gives you peace of mind if things start to trend south. 📉
Public and Coinbase are where I decide to add a little spice. Cause you know, allocating 5% of your overall portfolio to crypto is totally living life on the edge. 😜
At the end of the day, find a strategy that works for you... don't listen to me... I'm not a stock market expert, I'm just a dance teacher... this is not financial advice... do your own research... FUDGE > FUD... hey look! squirrel! 🐿️
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@AxA thank you ☺️🐿
Thanks for the callout! I've been telling the discord that the sectors they need to overweight going into 2022 are the financial and materials sectors as they're the only ones that are anywhere close to historical norms. You can't have historically low interest rates, historically high valuations (only higher one time in history 2000) then have those historically low interest rates start to rise a…See more
@sydward 🔥 nothing like 95% Red visual to confirm where things are now & where they are headed
Matthew George Wolach@mattw0
YAS love it!! Thanks for this info @sydward
Excellent summary! P/E is one of the ratios I use most when evaluating companies. It’s just one piece of the puzzle, but a very useful one (in my humble opinion).
@tcardizzle I agree. You can’t completely time the market but like you said you can make good logical decisions. There’s a lot of things lining up that are pointing to that conclusion it’s hard to ignore. I already had my eye on financials and planned to add more, but I didn’t realize how low basic materials was. The charts don’t lie!
@Arkygirl43 it definitely opened my eyes 👀
and then there’s me looking at that small sliver of green 😉 always looking for opportunities
I’m surprised to see industrials P/E to be so high
Enzo@enzo
Awesome post, Sydney! 🔥 Thank you for sharing 🙌
🦾 Oh nice post! Not many people talk about sector P/E’s and it’s a very important topic especially in this volatile climate.
Also cheers 🥂 to energy, financials and basic materials!
I personally like non-vaccines related healthcare stocks too as far as low P/E laggards go
Awesome post thank you 😘
Thank you! I’ve been looking for this!!
@sydward thank you so much for this information. I truly believe in some sectors you can predict what's going to happen. By being aware of what's going on in the world and some common sense goes a very long way.
JK
This is terrific info. I'm just really getting interested in true investing and this is just what I need to see to get started. Thank you!
Robert Erickson@bobintexas
Thank you; a great reference. Haven't seen a map like this before.
Emma@emmaz
Whoa that’s a lot of 🍎
Thank you for this information. 😇
It’s okay. Red is my favorite color …
Invest2Rest@Invest2Rest
Great info as always, SpongeBob would be so proud!! 😁💚
@enzo thanks 🙏🏼🙏🏼
@arbitrage yessss. I like $ABBV as a non covid play. It’s been hitting all time highs for the past two weeks. Warren buffet likes $ABBV too 😏
@TheSuzyQ of course ☺️
@willis79 glad I could help 😌
@MrC1969 you can never guarantee but yes you can use common sense to make an educated guess. It’s nice to know that some patterns repeat too time again and again which makes it easier to know what kind of cycle we are in
@bobintexas I would play with finviz.com/map.ashx
You can change it to reflect the stock performance, P/E, forward P/E, price/sales, price/book, dividend yield, etc. you can analyze the S&P 500, world performance, or ETFs… and the rest of the site has a lot of other tools as well
So I’ll be the first to say “I hate numbers” so bear with me, but what do the decimal numbers MEAN. For instance:
- Basic Materials 11.96
Is that 11 (price) to 96 (earnings)?
Or
Is that 11 (earnings) to 96 (price)?
Or am I just reading that completely wrong? How is it a ratio if we aren’t comparing one number to something else?
I’d say “explain it to me like I’m five”@sydward but I think that goe…See more
