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

  • Sold All of L Brands (LB) and Park Hotels and Resorts (PK) An article in CNBC scared us. L Brands (LB) could be a broken company.https://www.cnbc.com/2018/05/24/victorias-secret-might-be-broken-as-l-brands-slashes ...
    Posted May 28, 2018, 10:35 PM by Intelligent Investor
  • We Sold All of Our Shares in PayPal, We Saw Something Else We Liked Better We dumped Paypal (PYPL). The P/E Ratio is currently at 66 which is very high. The slowdown in earnings and revenue does not justify a P/E Ratio that ...
    Posted Feb 3, 2018, 8:18 AM by Intelligent Investor
  • U.S. Bank's (USB) Return on Equity is Greater than Wells Fargo (WFC) We just realized that U.S. Bank's (USB) Return on Equity is the highest out of all the major banks. It is greater than Wells Fargo (WFC), J.P ...
    Posted Feb 3, 2018, 8:20 AM by Intelligent Investor
  • My Research 2017 View Analysis: My Research 2017
    Posted Jan 15, 2018, 4:12 PM by Intelligent Investor
  • Looks Like Capitulation in Viacom (VIAB) Capitulation is when large institutional investors give up on a stock and sell all of their holdings in that stock. Capitulation is a sign of a bottom for a stock ...
    Posted Nov 17, 2017, 10:38 AM by Intelligent Investor
  • IBM's Fortunes Finally Turns Around Today Warren Buffett purchased IBM shares in the year 2012 worth billions of dollars. Yet the stock has pummeled and has been pounded downwards for the past 5 years. The company ...
    Posted Oct 20, 2017, 1:58 PM by Intelligent Investor
  • Exchanged AT&T (T) for Time Warner (TWX) and Dumped Hilton Worldwide (HLT) I exchanged AT&T (T) for Time Warner (TWX). Their merger currently gives TWX a 6% premium. AT&T is offering $107/share for TWX. Time Warner is currently priced ...
    Posted Sep 1, 2017, 4:36 PM by Intelligent Investor
  • My Stock Holdings 2017 View Analysis: My Stock Holdings 2017Hilton Worldwide Holdings (HLT) split into 3 companies. So we now own the following 3 Hilton companies:1) Hilton Worldwide Holdings (HLT)2) Hilton ...
    Posted Aug 28, 2017, 6:46 PM by Intelligent Investor
  • Repurchased Apple After Warren Buffett Confirms He Purchased it As a rule-of-thumb, if an investment has a Return on Equity (ROE) of greater than 30%, it means the company has a Durable Competitive Advantage. Apple's Return ...
    Posted Jun 5, 2017, 12:35 PM by Intelligent Investor
  • Purchased Hilton Hotels in Anticipation of a 3 for 1 Stock Spin-Off Last December I purchased Hilton Hotels in anticipation of a 3 for 1 stock spin-off. In other words, Hilton Hotels will be splitting into 3 independent companies. The most ...
    Posted Mar 1, 2017, 6:12 PM by Intelligent Investor
Showing posts 1 - 10 of 33. View more »