P/E Ratio

P/E Ratio means Price to Earnings Ratio. It takes the price of a stock then divides it by the Earnings per Share (EPS). The Price to Earnings Ratio is used for valuation. A higher value indicates that the price of the stock may be expensive. A lower value may indicate the price of the stock may be cheap.

During a recession, the Price to Earnings Ratio of many stocks is below 20 or sometimes below 10. It just depends on how bad the recession is. On the other hand, when the economy is good, the Price to Earnings Ratio of many stocks is above 20, sometimes above 40.

As a guide, we prefer to buy stocks when their P/E Ratio is below 18. If the P/E Ratio goes below 10, we have to be careful and make sure that the company isn't going out of business. Once we have determined the company isn't going out of business and the P/E Ratio is below 10 and there is also massive potential for growth in the company's earnings in the future, then that stock would be a big Christmas gift.

During a market boom, when the P/E Ratios of many stocks reaches above 40, consider selling stocks and buy Treasuries. Wait for the next recession to come. Expensive P/E Ratios of many stocks are an indication that there could be a recession waiting around the corner.

 

Equations

 

Consider buying the stock when:

P/E ratio is less than 18

Consider selling the stock when:

P/E ratio is greater than 40

My Financial Analysis of Stocks

  • The Market has Bottomed. It was on June 17, 2022 @Dow 29,653 It's time to buyBuy when we see redDon't buy when we see greenCover your PutsCover your ShortsBuy when there's bloodon "The ...
    Posted Jul 27, 2022, 10:46 PM by Intelligent Investor
  • We are still Accumulating our Favorite Value Stock Paramount Global (PARA) For the past several months we are still accumulating shares in Paramount Global (PARA) formerly known as ViacomCBS. And we are glad that our research has been validated by Berkshire ...
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  • Archive: My Stock Holdings 2021 View My Analysis: My Stock Holdings 2021
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  • Archive: My Stock Research 2021 View My Analysis: My Stock Research 2021
    Posted Apr 30, 2022, 8:40 PM by Intelligent Investor
  • We Think the Bottom for this Mild Correction may have Happened this Past Thursday on February 24th We do not see a recession in the near horizon. The U.S. economy is still growing. The Federal Reserve is still accommodative. The only thing we see is people ...
    Posted Mar 2, 2022, 3:08 PM by Intelligent Investor
  • Our Plan is to Buy the Dips. Buy Whenever We See Red. We believe the geopolitical issue occurring in Ukraine will be short-lived. We also believe that amidst a high-inflationary environment, many U.S. Equities will prevail. We plan to ...
    Posted Feb 26, 2022, 11:04 PM by Intelligent Investor
  • Swapped Disney (DIS) for more Paramount Global (PARA) A couple of months ago, we sold most of our shares in Disney (DIS) in exchange for Paramount Global (PARA), formerly known as ViacomCBS (VIAC). Unfortunately for us, we had ...
    Posted Mar 2, 2022, 7:28 AM by Intelligent Investor
  • Archive: My Stock Holdings 2020 View My Analysis: My Stock Holdings 2020
    Posted Jan 23, 2022, 6:55 PM by Intelligent Investor
  • Archive: My Stock Research 2020 View My Analysis: My Stock Research 2020
    Posted Jan 23, 2022, 6:56 PM by Intelligent Investor
  • Buying the Dip in ViacomCBS (VIAC) and Sold Pfizer (PFE) A very big opportunity came today to buy ViacomCBS (VIAC) at a ridiculously low price. Unfortunately we had to sell Pfizer (PFE). Pfizer has been a big disappointment for us ...
    Posted Mar 29, 2021, 12:09 AM by Intelligent Investor
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