Dear,
I am interning at an investment firm as an ER intern. I want to see how you determine if a stock is more expensive or cheaper than its fair value. How do you use P/E in this process?
Thanks!
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Check the PE against its historical average, highs/lows.
Never actually done that but I'd imagine you would look at the P/E against the ROI and run a regression with similar stocks? Would love some input on this too.
On a very basic level the P/E ratio will give you a quick glimpse. Compare the ratio to the closest competitors. Furthermore, a big factor when researching a company is understanding their products and how they differentiate from the competition. Do you believe it is a good product? If overall the valuation compared to its peers seems fair and you believe in their product and execution then it might be a good investment.
Now the more complicated, and technical, method starts with yoy growth, ROIC, all the way to building a DCF. However, for starters I would just focus on the financial statements and see if the numbers are convincing.
I hope this makes sense.
Yes, this is very helpful. Thanks!!
ROIC is a true indicator of value in a highly overvalued market environment, Live by this and the multiples tell the story
dear
Fear the Dear
You know it's expensive when Softbank buys it laddy
People are giving you sardonic answers because there's not much more than fundamental analysis (people can't give you over-valued stocks because they can't give you under-valued stocks). Remember that P/E represents earnings divided by (cost of equity - implied perpetual growth rate). What do you think about this implied growth or this cost of capital based on your own fundamental analysis?
P\E is a good starting point but not very useful in isolation. Like the first reply says, compare it to the company's historical P\E and compare it to the P\E of a handful of similar companies. Then if it's relatively higher or lower try to dig in a little bit to find out why. A high P\E relative to peers may be justified if its margins are better/improving or if its revenue/earnings growth is meaningfully higher. Conversely. A low P\E doesn't necessarily mean a company is cheap but could be because of deteriorating margins/earnings/growth or a capital structure that's out of wack. Definitely don't need to get too technical (regression, DCF, etc.) until you're doing deeper valuation work.
Buy high sell low!
I usually just go with my gut feeling
Take the P/E, use historical data, means test it opposing sector rivals and arrive at a more useful metric like the PEG. Once you’ve identified the champion of the sector, evaluate the the sector as a whole and weight the risk. Granted that’s how I determine value for my portfolio, but I have to justify choices to my investors.
I did PiV analysis of YOUR MOM last night ;P
Look for ntm p/e not p/e and compare that to comparable a is a good proxy if individual securities are overvalued compared to others.
But then again the comparable could always be overvalued as well
Look at MO & CSCO. Undervalued in this pricey (mostly) market. :)
If it relates to tech, there’s a 90% chance it’s overvalued. The source is my ass but seriously though.
Overvalued due to exaggerated expectations of management and investors?
You only know for sure after the fact....if you lost money.
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