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, multiply the Retained Earnings growth rate by 2 to get the maximum Price to Earnings ratio of a stock. Anything above that maximum means the price of the stock is too expensive.

When the P/E Ratios of many stocks reaches above 40 or when it is above the maximum Price to Earnings ratio, consider selling the stocks and buy Treasuries. Wait for the next recession to come. Expensive P/E Ratios of stocks are an indication that there could be a recession waiting around the corner.

 

Equation

 

Check if the price of the stock is too expensive:

Maximum Price to Earnings Ratio

My Financial Analysis of Stocks

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    Posted Mar 30, 2020, 8:35 PM by Intelligent Investor
  • Coronavirus Is The Black Swan Event That Ended The Bull Market In 2020 A Black Swan Event is an unpredictable event that causes catastrophic damage to an economy. A few days ago, we wrote an article describing the coronavirus as a Black Swan ...
    Posted Mar 18, 2020, 9:21 AM by Intelligent Investor
  • Beyond Meat (BYND) and Dunkin (DNKN), The End Of A Tale Of 2 Speculative Stocks During a recession speculative stocks get pounded down to the ground. Thus, we sold all of our shares of Beyond Meat (BYND) and Dunkin' Donuts (DNKN). Beyond Meat is in ...
    Posted Mar 18, 2020, 9:22 AM by Intelligent Investor
  • The Dow Jones Rallies 1294 Points, Sold More Stocks On This Dead Cat Bounce The Dow Jones jumps 1294 points a few days ago, however, we believe that this rally is a "dead cat bounce". We have to wait for the next quarter's ...
    Posted Mar 16, 2020, 9:56 PM by Intelligent Investor
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    Posted Mar 18, 2020, 9:23 AM by Intelligent Investor
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    Posted Mar 1, 2020, 10:47 AM by Intelligent Investor
  • Went On A Selling Spree Today I think this stock market bull run is over. I just have a hunch that it's over. However, I've been wrong before. The deadly coronavirus outbreak seems to ...
    Posted Feb 24, 2020, 10:41 PM by Intelligent Investor
  • Sold Apple (AAPL) At What Looks Like A Peak Apple (AAPL) looks like it may have peaked at $325/share. News came out during the past couple of days that Apples largest factory in China that makes iPhones is ...
    Posted Mar 18, 2020, 9:26 AM by Intelligent Investor
  • Beyond Meat (BYND) and Dunkin (DNKN), A Tale Of 2 Speculative Stocks Last year, we bought Dunkin' Donuts (DNKN) and Beyond Meat (BYND). We couldn't find any bargains, so we invested a small amount in these 2 speculative stocks.I've ...
    Posted Mar 18, 2020, 9:27 AM by Intelligent Investor
  • Stocks That We Bought and Sold for the Past Year to Date Sold John Deere (DE), it is a cyclical business and the trade war the U.S. has with China isn't making things any better. Berkshire Hathaway also sold their ...
    Posted Jul 27, 2019, 12:04 PM by Intelligent Investor
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