Exercise caution when it's PE time

Roger Montgomery

Montgomery Investment Management

Whether it be through reading the financial press, watching stock news programs, or by taking a formal valuation course, most investors are at least vaguely familiar with the price earnings ratio. In fact, the P/E ratio forms an integral part of the research process for many professional investors; the fact that it is readily available and easily calculable may have something to do with this number being so heavily relied upon. A closer inspection of this ratio reveals a number of unacceptable inadequacies. Investors who are a little more sophisticated in their approach will reason that a stock with a 30x P/E that is growing earnings at 40 per cent per year will be a prudent, justifiable purchase, given that it would trade at an “acceptable” P/E in just two years. However, the analysis would be incomplete without considering the degree of investment required to achieve that earnings growth. (VIEW LINK)


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Roger Montgomery
Founder and Chairman
Montgomery Investment Management

Roger Montgomery founded Montgomery Investment Management, www.montinvest.com in 2010. Roger has than three decades of experience in investing, financial markets and analysis. Roger also authored the best-selling investment book, Value.able.

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