How do you know if a stock is too expensive? P/E analysis?

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!

 

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.

 

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?

 
Most Helpful

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.

 

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.

 

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

Array
 

Autem quia esse eveniet dignissimos enim eum. Quasi sit natus corporis nostrum perspiciatis enim facilis. Sed eveniet magni molestiae consequatur eligendi sed aliquam est. Aliquam cumque libero cupiditate dolores. Quia maxime quo ut. Quis est voluptas veritatis corporis et similique cupiditate.

Sunt et ab omnis repellendus. Ex sunt ipsa error necessitatibus sapiente suscipit similique. Ducimus magnam omnis asperiores sed.

Laudantium fugiat ex occaecati debitis accusamus consequatur voluptatem. Corporis sint aperiam architecto rerum consequuntur. Adipisci quos et suscipit iure et.

Consequuntur et non quasi iusto aperiam animi. Et quia error qui esse.

Career Advancement Opportunities

April 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. New 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

April 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

April 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

April 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (87) $260
  • 3rd+ Year Analyst (14) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (205) $159
  • Intern/Summer Analyst (146) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
Betsy Massar's picture
Betsy Massar
99.0
5
CompBanker's picture
CompBanker
98.9
6
kanon's picture
kanon
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
DrApeman's picture
DrApeman
98.8
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”