#11 The lowest PE stocks are not always the most attractive
IML’s philosophy has always been to buy stocks with competitive advantage, recurring earnings, capable management at a reasonable price.
There are several methods that can be used by investors to assess the attractiveness a company’s share price. The most common methodology, often quoted by brokers and market participants, is the price earnings ratio – known as the PE ratio.
The PE ratio of a company is calculated by dividing the share price of the company by its earnings per share. The PE ratio is often used as a measure of assessing whether a company is ‘cheap’ or not. A simplistic view is that a lower PE stock is cheap while a higher PE is assessed as expensive.
In this week’s lesson we will discuss the reasons why the simplistic view of looking at stocks trading at the lowest price earnings ratios (PE) is not always the best approach for determining good value.