What role does P/E take in your decision?

I am trying to educate myself on stock investing. I am an engineer so like to gather quantifiable data to create a checklist to base decisions on.

One of the topics I keep seeing brought up is P/E ratios. Can someone help me understand what role they take in their investing decisions?

For example:

I own WFM. Their P/E is 24.7. I am considering buying SFM, whose P/E is 42.33.

I recall there being a range that P/E’s should fall within to be considered reasonable? What is a good range to reference and why?

Using the above example, it would appear that SFM is overvalued compared to WFM?

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First, the P/E should only be used in the broadest terms to value a company because it is almost a fantasy number. Poz has a method of using Positive Free Cash Flow. This is a number that is less given to manipulation by the executives.

The FOOL has a pretty decent school

http://www.fool.com/how-to-invest/index.aspx?source=ifltnvpn…

That covers a lot of this. It is the starting point.

Also, you will hear a lot on the difference between Fundamental Analysis, and Technical Analysis.

The richest man in the world rejected Technical Analysis, but he also does not delve to deeply into the balance sheets of the companies and often buys dogs, (Always at a great price and often in ways you and I cannot, like buying convertible bonds with some type of long dated option.)

I being the poor investor that I am, still like delving into the dark art of technical analysis.

http://stockcharts.com/school/doku.php?id=chart_school

Stock Charts has a good introduction. I also read some really thick books on it. At this time, correlation investing and investigation is gaining adherents. It is significantly more advanced than chart reading, but chart reading helps in a lot of way.

One of the problems that a lot of people have when they start investing is the idea of being right. You do not need to be right, you just need to be less wrong more than half the time. That little sentence, if you can internalize it will save you a ton of money. It is required for any type of active trading, and for investing.

Cheers
Qazulihgt

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One great discussion on p/e is in Peter Lynches book “One Up on Wall Street”, Part 2, Chapter 10 (Earnings).

The p/e ratio must be considered in light of earnings growth and many other factors in valuing a stock. I generally get cautious when p/e ratios exceed 30 since this generally implies very high growth expectations. Not everyone shares that view, but it has worked well for me over many years of investing.

Of course the investor must look at many things in valuing a stock including financial strength (the balance sheet), business sustainability, strength of management etc.

sw

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One of the topics I keep seeing brought up is P/E ratios. Can someone help me understand what role they take in their investing decisions?

If you want to understand how Saul looks at P/E, as well as a host of other investment considerations, I highly recommend reading through the FAQ/Knowledgebase at post 7972.

http://discussion.fool.com/faqknowledgebase-may-2015-31736505.as…

Neil

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I am trying to educate myself on stock investing. I am an engineer so like to gather quantifiable data to create a checklist to base decisions on. One of the topics I keep seeing brought up is P/E ratios. Can someone help me understand what role they take in their investing decisions?

Hi JC, If you came to this board and aren’t clear on PE’s, you must be in learning mode. You’ve come to the right place. I’d echo Neil: You should start with the Knowledgebase at post #7972. Once you are there you just might want to do a search for the Topic “What do all those letters mean?” You’re not the first to ask these questions.

Saul

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