P/E Ratios - LZ

Many people purchase stocks that have low P/E ratios. The feeling is that the stock is under priced. A P/E ratio is price/earnings ratio and is calculated on a per share basis. For example a stock at $20 which has $1 in earnings would have a P/E ratio of 20/1 or 20. Depending on the industry class ratios under 15 are often considered inexpensive. My belief is that P/E ratios can be very misleading and my research suggests that if you try to buy low P/E ratio stocks then you miss most of the winners.


A P/E ratio can be low because of low stock price or high earnings. If the price is low then one should assume it is low for a reason since the stock market is forward looking. A stock may have a P/E ratio of 10 today but if the next earnings come out at only half of the last earnings that immediately adjusts the ratio up to 20 from 10. Suddenly the stock looks expensive and if the earnings get worse the P/E ratio would be much higher.

A stock with future earnings potential usually gets bid up in price even before the great earnings come through making the P/E ratio appear very high. A stock might appear expensive with a P/E ratio of 50 until the day it announces great earnings, then suddenly the P/E ratio drops to some low level because of the high denominator (high earnings). Of course the price then starts climbing in recognition of the great earnings and up goes the P/E ratio again.

My suggestion is ignore P/E ratios.



LZ - $82.94

This stock is up on double average volume today even with the market down and is breaking into new highs. Earnings history show gains of 169% last qtr and 71% the qtr before and should be added to your watch list. The stock is currently extended and ripe for a sell off but should be reviewed if a pull back occurs on low volume. Of course a pull back on high volume means this stock should be removed from your watch list.