Happy 4th of July!!

Did you find yesterday's blog overwhelming?  Did you glaze over and just give up? I think it might have had too much information, so I am going to pare it down a bit here with this:

Spoiler alert:  You do not have to calculate the P/E on any stock yourself. The P/E and industry average for any stock you care to check is clearly posted on a site like Morningstar (and undoubtedly Vanguard, Fidelity and T. Rowe Price, if you have accounts with them). It's in the 'Key Stats' of a stock's quote page is posted right on the quotes page.

 

                                                                      &nbs…

                                                                                                                                                                   WHAT DID YOU SAY?????

So why the long explanation in the July 3rd post?  Because I like seeing how formulas are calculated. Yes, it is a sickness, but seeing the components of calculations like P/E's just makes me happy. But like Dorothy in the movie version of The Wizard of Oz, you could have gotten home without all the shenanigans. 

Here's the condensed gist of what to remember:

  1. The P/E of a stock helps us understand the real value of a company's stock. It can be helpful in seeing whether a stock is over-priced or under-valued. 

  2. The P/E is calculated using the company's past earnings over the past 12 years (trailing P/E). Because of this, P/E alone does not show a company's growth potential.

  3. A rising stock price results in a higher P/E.  A decreased stock price means a lower P/E.

  4. A stock's P/E should only be compared with other stocks in its industry. So its industry average should be looked at to see whether the stock is a possible bargain (lower than industry average P/E) or possibly overpriced (higher than industry average). Think apples to apples comparisons!

  5. A stock with a higher than average P/E is usually considered a growth stock.  Growth stocks often reinvest their profits directly into the company so they can grow even more. In some cases, they are simply overpriced-- but they can really pay off as well if they do grow as expected. Because of this, growth stocks have more risk associated with them, but also more potential reward. They are usually more expensive to buy than value stocks. 

  6. A stock with a lower than average P/E is usually considered a value stock. These stocks are often less expensive to buy that than others in their industry.  They often pay dividends and are slower to grow than growth stocks. So the risk is lower, but so is the reward. 

Enjoy your day!!