Think Twice Before Using the Forward P/E Ratio

The financial industry has managed to confuse investors by implying that stocks are attractively valued based on their forward price-earnings ratios. This according to Joachim Klement, CFA, in a July issue of Enterprising Investor. Klement argues that many investment reports and financial media pundits claim that a stock is “attractively valued because its forward P/E is such and such,” but studies on value factors are actually conducted using trailing price-book and price-earnings ratios. “Recognizing the… Read More

Median P/E and P/S Ratios Show Overvaluation

Ned Davis of Ned Davis Research told MarketWatch, “Median price/earnings and price/sales ratios higher than at peaks in 2000 and 2007 are clearly a concern.” The comment is based on data from the firm’s recent study, depicted in the graph below, that suggests particularly high overvaluation based on examining the median price/earnings and price/sales ratios of NYSE-listed stocks. The P/E ratio is 25.6, based on 12-month trailing earnings, and the P/S ratio is 2.16, both… Read More

Re-defining Value

The value premium may seem to have disappeared. Since 1926, cheaper stocks have outperformed expensive ones by 400% according to data from Normura (see graph below). Since February 2007, however, a value investor relying on price-to-book, which is the traditional measure of value and defining trait of the Russell 1000 Value Index, would not have reaped the gains that one would expect from this historical data. Why? Barron’s reports that, according to Joseph Mezrich of… Read More