Showing posts with label Low Price-Earnings Investor. Show all posts
Showing posts with label Low Price-Earnings Investor. Show all posts

Friday 15 June 2012

What should you do if you find that the price or P/E is significantly above or below the historically fair price or fair P/E mark?

"It is better to buy a wonderful company at fair price than a fair company at wonderful price."

In general, if you can buy a quality stock today for a historically fair price or fair P/E, you should probably do so, provided the reward and risk are attractive.

However, what should you do if you find that the price or P/E is significantly above or below the historically fair price or fair P/E mark?

A low price or low P/E is probably your biggest concern, because it suggests that people who are buying the stock today might know something negative about the company that you don't know.

Think about it.  Why would investors pay less for the stock than it has typically sold for?

  • Is there something in the news that you haven't heard about?  
  • Has an analyst - or have a number of analysts - announced a reduced expectation of future earnings based upon something they know that you don't know?  
  • Have you missed something in your quality analysis - or (shame on you!) recklessly jumped over that barbed-wire fence, failing to evaluate quality deliberately enough before moving on to look at the value considerations? 
(E.g. Transmile, KNM).

If the price or P/E is too low - move on to another company and forget about looking at the risk and reward.  You may miss a few good stocks, but you won't have to lose any sleep worrying about being wrong.



If the price or P/E ratio is too high, this tells you two things.

  1. The first is that other investors appear to agree with you about the quality issues, because they are paying a healthy price for the stock.  
  2. The second is that it may be too healthy a price.  
  • You may want to put off buying it until the price becomes more reasonable.  
  • Or, it may be worth the premium if the risk and reward are satisfactory.

(E.g. _____________)

Just know that, if you buy a stock whose price or P/E is too far above the fair price or fair P/E, when it later comes back down - which it usually will - the decrease in P/E can reduce your gain considerably.  Your chances of having a superior portfolio are far better if you select stocks for which you don't have to make any allowances.  


As you gain more experience, you'll find that you can make some intelligent exceptions in cases of high or low price or P/E, but for now, the advice for those who are just starting out, don't.

Monday 6 February 2012

A Subnormal P/E

When a stock is selling at a P/E significantly lower than that of its competitors, an investor will want to know why?

A low P/E does not necessarily mean higher risk, though the company should be studied with that possibility in mind.

  • The low P/E stock may be selected anyway if, for example, it is a cyclical stock at a low in its cycle.   Cyclical stocks - automobile manufacturers are the most notorious among them - periodically develop fire-sale P/E ratios.  
  • Other out-of-favour stocks also can drop to surprisingly low P/Es.

On the other hand, if a stock is cheap in terms of its multiple for a troubling reason (or permanent deterioration of  business  fundamentals), such as pending depletion of oil or mineral reserves or a patent expiration, the value investor may want to shop elsewhere.




Comment:
Often the low P/E is appropriate for the stock as it is perceived to have poor potential for growth or its earnings are poor, volatile and less stable.

Friday 25 March 2011

Price-Earning Ratio 101

What actually is PER?

It's often said that the PER is an estimate of the number of years it'll take investors to recoup their money. Unless all profits are paid out as dividends, something that rarely persists in real life, this is incorrect.

So ignore what you might read in simplistic articles and note this down: a PER is a reflection not of what you earn from a stock, but “what investors as a group are prepared to pay for the earnings of a company”.

All things being equal, the lower the PER, the better. 



But the list of caveats is long and vital to understand if you're to make full use of this metric.





PER:  Historical versus Forward or Forecast PER

The PER compares the current price of a stock with the prior year's (historical) or the current year's (forecast) earnings per share (EPS). Usually the prior year's EPS is used, but be sure to check first.

For example:

Last financial year, XYZ Ltd made $8 million in net profit (or earnings). 
The company has 1 million shares outstanding.
So it achieved earnings per share (EPS) of $8.00 ($8 million profit divided by 1 million shares). 
In the current year, XYZ is expected to earn $10 million; a forecast EPS of $10.00.
  • At the current share price of $100, the stock is therefore trading on a historic PER of 12.5 ($100/$8). 
  • Using the forecast for current year's earnings, the forward or “forecast PER” is 10 ($100/$10).



Quality has a price to match

Quality usually comes with a price to match. 



It costs more, for example, to buy handcrafted leather goods from France than it does a cheap substitute from China. Stocks are no different: high quality businesses generally, and rightfully, trade on higher PERs than poorer quality businesses.





Low PER doesn't alone guarantee quality business
  • Value investors love a bargain. Indeed, they're defined by this quality. 
  • But whilst a low PER for a quality business can indicate value, it doesn't alone guarantee it. 
  • Because PERs are only a shortcut for valuation, further research is mandatory.

High PER with strong future earnings growth maybe a bargain
  • Likewise, a high PER doesn't ensure that a stock is expensive. 
  • A company with strong future earnings growth may justify a high PER, and may even be a bargain. 
  • A stock with temporarily depressed profits, especially if caused by a one-off event, may justifiably trade at a high PER. 
  • But for a poor quality business with little prospects for growth, a high PER is likely to be undeserved.

Avoid a Common trap: Use underlying or normalised earnings in PER


There's another trap: PERs are often calculated using reported profit, especially in newspapers or on financial websites. 


But one-off events often distort headline profit numbers and therefore the PER. 


Using underlying, or “normalised”, earnings in your PER calculation is likely to give a truer picture of a stock's value.





What is a normalised level of earnings?

That begs the question; what is a normal level of earnings? That's the $64 million dollar question.



 If you don't know how to calculate these figures for the stocks in your portfolio, now is the time to establish whether it's skill or luck that's driving your returns. And if you don't know that, history may well make a monkey of you.




An old encounter with low PE stock: Hai-O


It is nostalgic to re-read an old post on Hai-O by ze Moola. Smiley

http://whereiszemoola.blogspot.com/2008/04/more-on-haio.html

Sunday, April 13, 2008
MORE ON HAIO

My dearest BullBear,

A low PE stock means only one thing and that is the stock is trading on a lower valuation compared to what it is currently earning.

Some simply consider that what is happening is the stock is being ignored in the market despite its impressive earnings.

Why?

The market could be wrong and that perhaps this is a stock that's an ignored gem. Yeah, the classical hidden gem and if this is the case, investors who invests in the stock could be rewarded for their stock selection.

However, on the other hand, sometimes the market could be right and that they do sense something is not right within the stock.

And because of this reasoning, I have always realised that a low PE stock does not make a stock a QUALITY stock.

It just means the stock is trading 'cheaply'.

It could be a bargain but it could also be a trap.

Saturday 24 April 2010

A quick look at Ajiya (24.4.2010)

Ajiya Berhad Company

Business Description:
Ajiya Berhad. The Group's principal activities are manufacturing and supplying materials used in the construction and related industries. It offers metal, zinc and aluminum products for roof building, ceiling, window, and door frame and other similar products, as well as safety glass and other glass related products. Other activities include carrying on business as manufacturers, commission agents, manufacturers' agents, contractors, sub-contractor and dealers in all types of metal products and building materials, as well as providing, designing and installing metal sheet roofing and insulator materials. It also operates as an investment holding company. Operations are carried out in Malaysia and other countries.


Wright Quality Rating: LAB1 Rating Explanations
Stock Performance Chart for Ajiya Berhad






A quick look at Ajiya (24.4.2010)
http://spreadsheets.google.com/pub?key=tD3AF4z8Z_78wCEiKBcca6Q&output=html

Comment:
Profitable.
Strong balance sheet.
Low ttm-PE of 6.17, DY 2.10%
PE is low, reflecting its earnings growth potential.

Friday 16 April 2010

Low P/E stocks: Are they trash or are they treasure?


Some Lowest P/E Stocks

LTKM 3.02
KUMPULAN FIMA 4.06
MEASAT GLOBAL 4.54
COASTAL 5.31
AJIYA 5.40
KLCC PROP 5.76
PANTECH 5.87
DXN 6.15
POH KONG 6.22

The above was posted on 25th January 2010.


There are reasons that stocks sink to a discount. 



Low PE stocks may have:


  • high risk earnings or

  • low growth.
Buying discounted shares doesn't always end happily, but it often does.

Nevertheless, if earnings gains keep improving, so should the P/E.


LOW P/E stocks don't just do more on the upside; they behave better when the market is falling.


Low PE stocks have little anticipation or expectation built into their price. Therefore, any improvement in performance is likely to boost the attention they get, while they suffer little if their results don't meet the Market's already low expectation.


The investor's call now is to decide 

  • whether these groups can stage yet another comeback, or 
  • whether they are on the slow train to oblivion.
The challenge of course, is separating the stocks 
  • that are unfairly being beaten down because of overreaction 
  • from those that deserve their low prices.


The graph below depicts the KLCI index.  The KLCI has risen since January 2010, lifting the prices of many stocks with it.




It should be interesting to see what have happened to these above counters since.




Stock Performance Chart for LTKM Berhad
Wright Quality Rating: LBD8 Rating Explanations



Stock Performance Chart for Kumpulan Fima Berhad
Wright Quality Rating: LAB1 Rating Explanations



Stock Performance Chart for MEASAT Global Berhad
Wright Quality Rating: DBL1 Rating Explanations



Stock Performance Chart for Coastal Contracts Bhd
Wright Quality Rating: LAA2 Rating Explanations



Stock Performance Chart for Ajiya Berhad
Wright Quality Rating: LAB1 Rating Explanations



Stock Performance Chart for KLCC Property Holdings Bhd
Wright Quality Rating: CCB0 Rating Explanations




Stock Performance Chart for Pantech Group Holdings Bhd
Wright Quality Rating: DANN Rating Explanations




Stock Performance Chart for DXN Holdings Bhd
Wright Quality Rating: LBC0 Rating Explanations




Stock Performance Chart for Poh Kong Holdings Berhad
Wright Quality Rating: LBC6 Rating Explanations


The last 3 months and 5 years charts were shown for each of the above stocks.


Looking at the last 3 months price action:


Prices trending upwards:  LTKM, KFima, Measat, Coastal and Ajiya  (That's not a bad bet for investors willing to wait for multiple expansion)
Prices moving sideways:  KLCCP, Pantech, DXN
Prices trending downwards:  Pohkong


A rising tide (market) lifts all boats (stocks).  Also, there are always a lot of casualties after a bull market.  Knowing that the bull market is a more dangerous period than a bear market, what can we learn, if any, from these price behaviours?


John Neff wrote, "Indifferent financial performance by low PE companies seldom exacts a penalty. Hints of improved prospects trigger fresh interest. If you buy stocks when they are out of favour and unloved, and sell them into strength when other investors recognize their merits, you'll often go home with handsome gains."


If you have any last doubts about low P/E investing, consider this:The history of low P/E investing makes it clear that you stand to make money twice. 

  • First, you win when companies start to earn bigger profits and share them with you by way of fatter dividends and rising share prices. 
  • This will wake up all those investors who've been sleeping on the sidelines. They'll start buying, the multiple will increase, and presto!--you've won again. 

Related posts:

Low PE stocks may have high-risk earnings or low growth.



Low Price-Earnings Investor



Finding great values in low P/E stocks that are set to rise


Tuesday 26 January 2010

Some Lowest P/E Stocks

LTKM 3.02
KUMPULAN FIMA 4.06
MEASAT GLOBAL 4.54
COASTAL 5.31
AJIYA 5.40
KLCC PROP 5.76
PANTECH 5.87
DXN 6.15
POH KONG 6.22

Friday 13 November 2009

Finding great values in low P/E stocks that are set to rise

CHEAP STOCKS: ARE THEY TRASH OR ARE THEY TREASURE? A PORTFOLIO OF STOCKS SELLING FOR THE LOWEST PRICE/EARNINGS MULTIPLES WILL DO SIX TIMES BETTER THAN ONE WITH THE HIGHEST P/ES ... ... DO WE HAVE YOUR ATTENTION?

By SUSAN KUHN REPORTER ASSOCIATE KIMBERLY SEALS MCDONALD
October 16, 1995

(FORTUNE Magazine) – EVERY SO OFTEN you've got to say the heck with all those brokerage reports, newsletters, and other materials that entire forests died for. Let's face it, there are only three sure ways to beat the stock market bogey:

One: Get your investment banker brother, or some other well-placed friend, to tip you off about the next big merger;

Two: Undergo a mind meld with stock picker extraordinaire Warren Buffett; or

Three: Be a pirate, and grab a fistful of shares for way less than they're worth.

This story is not about the felonious option No. 1 or the science-fictitious No. 2. But it is a map that will lead you to the X that marks the spot where treasure often lies buried.

The X is the P/E ratio, the price of stocks relative to earnings per share, of various companies. You'll find P/Es right in the newspaper. Your task is to identify the ones that fall short of the market average--it was a recent 16.5 for Standard & Poor's 500-stock index. The signal is clear: Dig here and odds are you'll get rich. Make that very rich. Over time, say numerous studies, a portfolio of these discounted stocks will do six times better--that's right, I said six times--than a portfolio made up of shares with the highest P/E ratio. Are all you technology investors listening?

And those startling numbers are just the averages. You can improve on that performance by finding low P/E stocks that are set to rise. But which ones are they? You've got many shares to choose from in the world of low P/Es, ranging from down-and-out commodity companies to the fallen angels of tech. Some dip into discount territory for a quarter or two while others are relegated to the basement for decades on end. Your job--and the purpose of this story--is to separate the living from the dead.

Few stock groups have spent as much time in low P/E country in recent years as banks, tobacco companies, and retailers, so if you are serious about low P/E investing, you've got to make a call on these. The average major regional bank now sells at a 36% discount to the S&P 500. Tobacco companies are taking a 25% haircut. Department stores trade at an average P/E that is 18% lower than the S&P's. These three groups have spent much of the past 25 years with low P/Es, and in recent years their discounts have grown ever steeper, so their potential looms large.

Even so, as any bargain hunter with muddy boots knows, there are reasons that stocks sink to a discount. Banks, for instance, have had an unerring tendency to sabotage their balance sheets periodically with bad loans that blow up like a Scud missile. And cigarettes? Well, the short of it is that they can kill you. As for putting money into a big department store chain, why invest in an outfit that has lost so many big spenders to specialty stores?

But try to think of these well-known problems as opportunities--not only for companies to turn around but also for you to get in on the change. Still not convinced? Here's a broader perspective: Take a low P/E stock and turn the multiple upside down (that is, divide earnings per share by the stock's price). What you'll get is something called the earnings yield, which tells you how much you'll earn on your money if you buy the stock at that price. Compare this with the interest the same money would earn elsewhere, and you'll see just how bountiful these cheap stocks can be. At 16.5 times earnings, stocks in the S&P 500 earn an average 6% a year, only a very slight edge over the 5.4% paid by most money market funds and well shy of the 7% you'd get on 30-year bonds. On the other hand, regional banks sell for 10.5 times earnings, equal to a juicy earnings yield of 10%. Of course, you get only part of that 10% return mailed to you as a dividend. The rest is plowed back into the company and should boost the stock price by adding value to the company.

Buying discounted shares doesn't always end happily, but it often does. Consider the story of Nike. Beginning in the mid-Eighties, when Wall Street thought the company's days were numbered, the stock sold at six to nine times earnings, at a 50% to 70% discount to the market. From 1983 through 1990, despite some difficult years, the company managed to increase earnings fourfold as it transformed itself into a global marketing giant. This upward earnings trend continued over the next five years, and the market finally awarded the stock a higher P/E multiple. Nike shares increased 230% in value, half that gain coming from better earnings and the other half from a rise in the P/E multiple. Its shares are now trading at $92.50, 17 times earnings, a 3% premium to the market.

Nike investors who bought shares early never had any guarantees that this treasure hunt would end up the way it has, of course. Similarly, it's impossible to be certain that every bank, tobacco company, and department store will transform itself into gold. Nevertheless, if earnings gains keep improving, so should the P/E. And if those gains are as good as or better than the market's average rate of profit growth--11.8% annually over the next five years, according to a forecast by the Institutional Brokers Estimate System--then the P/E multiple should eventually be as good as or better than the overall market's. As long as these wheels are turning, the only thing you need is patience. Explains Robert Rodriguez of First Pacific Advisors in Los Angeles about this potential double-dip payoff: "If I buy a company that is cheap relative to its assets, I let the market worry, not me. If I am right about improvements, then I'll get profitability squared. Rising profits and a rising P/E multiple equals a financial home run."

This twofold kick is something pricey shares can't match. A stock like Microsoft, way out there at some 40 times earnings, must get its earnings to sprint ahead every year just to keep the stock from tumbling. Bill Gates may be able to meet this challenge, but over time the more expensive companies tend to falter. Earnings gains eventually lose speed, the P/E multiples inevitably contract, stock prices fall--and investors lose money.

The technology crowd may not wish to be reminded of this, but their chances of scoring in stocks are actually lower with the high P/E titans of tech than they are with the downtrodden shares of unloved industries. Ken French and Eugene Fama, professors at the Yale school of management and the University of Chicago, respectively, recently pounded this point home with a study of high and low P/E stocks. They measured the performance of shares on the New York Stock Exchange from July 1963 through 1993 and found that the 10% of those with the lowest P/E multiples outperformed the 10% with the highest multiples by an average of 7.6% a year. Over 30 years, every dollar invested in the low P/E group returned at least $100 more to investors--a lot of money by any account (see chart).

LOW P/E stocks don't just do more on the upside; they behave better when the market is falling. David Dreman, chairman of the Kemper-Dreman mutual fund firm in Jersey City, recently compared the total return of 1,200 stocks over a 20-year period ending in 1993 and found that when the market fell, the 20% of stocks with the lowest P/Es outperformed the 20% with the highest P/Es. The difference in quarterly losses averaged a huge 41%.

Of course, you can't make money in stocks just by citing some uplifting academic studies. Eventually you've got to put down some money, and that brings us back to the three industries mentioned above--banks, tobacco, and retailers, which have all been in the market's cellar for years. The last time that banks sold at a premium, John Kennedy was President. Once-fat premiums for tobacco companies petered out in 1953, blipped again in the 1970s, and collapsed once more in the early 1980s as health- related lawsuits scared an increasing number of Wall Streeters. Retailers have had some days in the sun over the years, but there haven't been many. From 1946 to 1953, department stores in S&P's universe, which includes May and Federated, sold at a premium to the market. From 1951 to 1963, "mail-order and general chains" like Sears Roebuck became the investor's darlings. Department stores were back in Wall Street's affections until the 1980s, when specialty stores like the Gap displaced them.

The investor's call now is to decide whether these groups can stage yet another comeback, or whether they are on the slow train to oblivion.

BANKS. Among all the low P/E stock groups, none holds as much opportunity for gains as the banks. No doubt, they are in their best shape in years. "It's banking heaven," says CS First Boston analyst Thomas Hanley. Since the dog days of 1990, when earnings and capital reserves had been pummeled to the ground after a disastrous decade of bad real estate loans and defaults on loans to Third World countries, banks have been shaping up their act. Their balance sheets look so fine that the FDIC recently voted to halve the rates banks must pay for deposit insurance. Well capitalized and healthy, many banks are looking to take some of the volatility out of their earnings by developing fee-based businesses. Selling mutual funds, for example, generates a steadier flow of profits than high-risk lending. Helping matters along, the steadily expanding economy and low inflation have been good for business.

Another trend likely to buoy the banks' P/Es: Legislation allowing interstate banking nationwide goes into effect next year, which will allow strong banks to pick up more retail customers. Even more important to investors, the wave of mergers should lead to higher stock prices in this sector as investors accord bank stocks the prices that more closely reflect their potential value as takeovers.

Sound balance sheets, a favorable economy, interstate banking, and consolidation could combine to drive bank stocks to much better valuations. "Before we are finished," says Hanley, "both money center and regional banks will be at or near a market multiple." He predicts this will happen "by the middle or end of 1996." There, in a blink, is a 36% gain in your pocket, as the discount fades away.

Make no mistake, banking as an industry is going through a take-no-prisoners sea change. Some institutions will drown and others triumph in the storm that's already raging in the erosion of interstate banking restrictions and the Glass-Steagall act, which separated the banking and securities business. The latter extends investor opportunities to brokerage firms, which Smith Barney notes carry an average discount of 16%, and to life insurers, 18%.

Clearly, winning banks will pick specialties that suit them, or a breadth of services that sets them apart from competitors--or both. In Minneapolis, for example, Norwest bank has moved smartly into new businesses but continues to lend money very well. As Larry Puglia, co-manager of the T. Rowe Price Blue Chip Growth fund, puts it, "The most important reason to own Norwest is that the credit culture is very strong there, and that's a fancy way of saying that they tend to get repaid when they lend money." (For more, see box.)

Or consider Citicorp. At $67.50, it sells for nine times earnings, a sizable 45% discount to the market. Fans include Richard Dahlberg, director of U.S. equities for Salomon Asset Management, who says, "I think there is a definite potential for financials to break out of their bands. Citicorp is a case in point. They stayed in the international area and strengthened their position in the hard times, and now that's providing an accelerating growth rate. That will be taken into consideration when you look at the multiple on the stock. That kind of company may be held in esteem instead of disrepute."

Banks may be transforming, but like Dorothy on the road to the Wiz, they're not there yet. Final destinations could turn them into one-stop financial-services centers like Charles Schwab, an outfit that offers free checking accounts and ATM cards as well as software that enables investors to use their home PCs to trade stocks, mutual funds, and money market accounts. That wouldn't be the worst fate to befall banks--at a recent $26.75 per share, Schwab commands a P/E of 33.3, or nearly three times the average bank multiple.

Investors looking for banks that might be headed for higher ground should also consider Wachovia and Mellon, which tied for first place in a "1997 cream of the crop" list put together by First Boston's Hanley. He ranked contenders on criteria such as expected return on assets, expense ratios, the mix of interest-rate-sensitive and other earnings, and dividends. Mellon, with its recent Dreyfus acquisition, has been aggressively diversifying into fee-based business, and if it can digest the purchase (see "A Bitter Lesson for Banks," August 21), its earnings may be as predictable as a clock. Wachovia, on the other hand, has stuck with its basic banking business, but the quality of its assets, tight controls on expenses, and strong generation of equity capital are exceptional. Though profits should be plentiful in the years ahead, stock prices are still cheap relative to expected earnings this year. At $45 a share, Mellon trades at 11 times 1995 earnings. At $41 a share, Wachovia carries a P/E multiple of 12.

TOBACCO. Tobacco companies could easily teach everybody a lesson or two about generating profits. For decades the industry has generated margins in the smokin' 20% range and up, vs. a 5% median for the Fortune 500. In earlier days, this meant the tobacco stocks sold at a stiff premium. Not anymore. The Food and Drug Administration's push to regulate tobacco has whacked stock prices, and so too have a host of class-action lawsuits brought by, or on behalf of, smokers who contracted lung cancer and other diseases they say were caused by smoking. The biggest threat: a class-action lawsuit named for Dianne Castano, the widow of a smoker who died of cancer. It would permit all who are or who have been addicted to nicotine, a potential horde of 80 million people, to seek damages as a group. A district court backed the suit. The industry, which wants to make every plaintiff sue individually, is appealing. With so much bad news looming, it's hard to imagine how much lower tobacco stocks could be priced. The industry had its biggest defeat in late August, when a smoker who had sued Lorillard and its filter manufacturer for an asbestos-related disease won $2 million. But the stock of Loews, Lorillard's owner, actually rose when the news hit. That could be a sign that prices for the industry have bottomed out. Says Paine Webber analyst Emanuel Goldman: "These stocks absolutely have the potential for expansion. Say the Fifth Circuit decertifies Castano. It would take 22 seconds to be reflected in higher stock prices." At a recent price of $74.75, industry leader Philip Morris trades at 12.5 times earnings, well below the S&P 500. How high could the multiple go? "If Philip Morris goes to a market multiple today, the stock goes to $110," says he. "Probably more, because it implies the external issues have been pushed to a back burner."

That kind of gain is not puffery. Neither is Philip Morris's financial picture. In the past ten years, sales and earnings have increased at a compound rate of 18.5% per year, dividends have gone up 22% on average annually, and book value has tripled. It bought General Foods in 1985; in 1988 it added Kraft. Food now accounts for over half of revenues and more than a third of operating profits, and is worth plenty. David Dreman has done a dead-or-alive analysis, assuming Philip Morris made no money on its domestic cigarette business. The 40% left was still growing at a 15% clip. If the stock price merely matches the company's annual earnings growth rate of 15% or more, investors will do nicely. Add on a 5.4% dividend, and total returns leap above 20%.

That's not a bad bet for investors willing to wait for multiple expansion. And wait they might. Tony Hitschler, a value manager with Brandywine Asset Management in Wilmington, Delaware, is not as confident as Goldman that multiples will expand right away. Says he: "With tobaccos, I believe the perceived risks and the actual risks are in line. Though the industry has been incredibly successful, the mores of our society are so much against them. I would like to see a significant price correction on bad news, which could be more liabilities, or limits on their markets." Nonetheless, even he cannot resist some of the values in the group. He's choosing RJR Nabisco, which trades at 4.6 times cash flow, half of Philip Morris's price-to-cash-flow multiple, though RJR also has more debt. The stock is now $28.38 a share. Sanford C. Bernstein, a New York City investment management company that specializes in value investing, believes Philip Morris, RJR Nabisco, Loews, and especially UST are all attractively valued, even in light of litigation and regulation risks.

RETAILERS. If you really want to go shopping for bargains, check out department store stocks. After years of watching customers leave for fancier fare, some of the best stores have finally stepped back into fashion. Says Walter Loeb, a longtime retailing-industry analyst at Morgan Stanley who now has his own firm in New York City: "Today, as I see it, there is a resurgent interest in Sears, Federated, even May. I expect there will be multiple expansion in these stocks, to a market multiple or better."

At specialty stores, the big retailers' competition, troubles are rising faster than hemlines. Sales from women's apparel have dropped dramatically, and some former star performers are losing their edge the most. Earnings at the Limited are off 11% in the first half of their fiscal year, ending in January. The Gap's profits have declined 23% compared with the same period a year ago. Their P/E multiples are also falling. The Gap's stock was selling as high as 59 times earnings in 1992. At $33 a share, the multiple is down to 16.3. The Limited's multiple peaked the same year at 32.9 times earnings and is now 15.6.

Yes, there are too many department stores fighting for the customers coming back, particularly given still-weak spending patterns. The big winners will be so-called destination stores, places that seem to hold the biggest drawing power. When you go to a mall in the future, Macy's and every other retailer around want to make sure you go there first.

Nordstrom is the rare diamond that shows what dominance can do. The Northwest-oriented retailer is consistently known for superior customer service, great-looking stores, and nice clothes, all translating to strong profits. Over the past ten years, its P/E on Merrill Lynch's earnings estimates one year out has averaged a high 32% premium relative to the S&P 500. Most department stores sell at discounts. May, for example, has a ten-year average discount of 16% relative to the market.

May, Federated, and Sears (now classified as a department store, having shed Dean Witter, Allstate, and other operations) look especially fit and in shape for investor plays. May and Federated, moreover, are themselves shopping for acquisitions. May, recently $42.50 a share and 14 times earnings, has bought a number of stores, including 13 Wanamaker outlets in Philadelphia. Federated, of course, has swallowed Macy's, and announced in August that it will buy Broadway Stores in California. Sears is increasing same-store sales faster than many of its peers. At $33.88 and just seven times earnings, it is especially cheap. "The stores look terrific and more useful, and I expect they will be more of a destination in malls again," says Loeb (for more on Sears, see Companies). Loeb is looking for the three to expand earnings 14% to 15% a year for five years, ahead of the market.

For retailers, tobacco companies, and banks, the ingredients are in place to take the stocks to a market multiple. Cheap or chancy? Make no mistake: Some companies live in the basement because that's their natural habitat. Electric utilities, for example, have sold at a discount because their profits have been largely regulated. The coming deregulation is sure to knock down shareholder value even more. As for the three stock groups we've reviewed here, well, that's a better story.

If you have any last doubts about low P/E investing, consider this: The history of low P/E investing makes it clear that you stand to make money twice. First, you win when companies start to earn bigger profits and share them with you by way of fatter dividends and rising share prices. This will wake up all those investors who've been sleeping on the sidelines. They'll start buying, the multiple will increase, and presto!--you've won again.



http://money.cnn.com/magazines/fortune/fortune_archive/1995/10/16/206857/index.htm

Tuesday 23 June 2009

Low Price-Earnings Investor



What does PE ratio signifies?

1. One of the common explanations of the PE ratio is that it tells you how much investors are willing to pay for every dollar in earnings that a company is generating.
2. However, PE ratio is also a measure of what kind of growth, investors are expecting from a company in the future.
  • For example, take two stocks, one with a PE of 50 and the other with a PE of 10. Earnings drive stock prices, so if investors are willing to pay 5 x as much for one company's dollar of current earnings as they are for the other company's dollar in current earnings, they must be expecting that the first company will grow earnings much more rapidly than the second.


This idea of expectation was key.

  • High-flying growth stocks with high PEs had so much expectation built into them that they often fell at the slightest sign of disappointment.
  • Low PE stocks, however, have little anticipation or expectation built into their price. Therefore, any improvement in performance is likely to boost the attention they get, while they suffer little if their results don't meet the Market's already low expectation.


Low PE Investing

John Neff wrote, "Indifferent financial performance by low PE companies seldom exacts a penalty. Hints of improved prospects trigger fresh interest. If you buy stocks when they are out of favour and unloved, and sell them into strength when other investors recognize their merits, you'll often go home with handsome gains."

Neff continuously searched the newspapers for companies with low PE ratios (i.e. the least popular stocks in the market), also keeping tabs on those that had just posted new lows or were getting hammered in the press. From these shunned firms, he used a series of quantitative measures to identify those that were good bets to rebound.

He explained, "Swept up by flavours of the moment, prevailing wisdom frequently undervalues good companies. Many - but not all - that languish out of favour deserve better treatment. Despite their solid earnings, they are rejected and ignored by investors caught in the clutch of groupthink."

The challenge of course, is separating the stocks that are unfairly being beaten down because of overreaction from those that deserve their low prices.

What is 'low' PE ratio?

"You should look for stocks with a low PE ratio." What is 'low'?
Depending on your point of view, low PE ratios could mean:
  • PE of 5 or below
  • PE of 15 or below
  • anything less than the median PE of the S&P 500 industrials
  • PE in the bottom 20% of the market
  • PE that is less than the annual EPS growth rate of the company (PE/EPSGR ratio less than 1)
All the above precise definitions of 'low' PE have been used by various investors.