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PRICE/EARNINGS RATIO AS YOUR INVESTMENT YARDSTICK

This article is reproduced with permission from
Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
Tel : 03 - 469 5560 Fax : 03 - 294 5561


This article is copyright and no part of it may be reproduced in any form without the prior consent of Normandy Advisory Services


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In short, these stocks normally have the potential to meet growth expectations. But what about speculative stocks on the second board with very high P/Es? Should one invest in them?

Probably not! Some of the stocks have been pushed by speculators to levels beyond what they are actually worth. Some speculative stocks on the second board are traded purely on rumours by local punters and it is hard to justify the value of the stock.

Last year, some of the smaller companies' P/Es on the second board were valued at more at 400x their earnings. Would you believe them?

Analysts normally look for certain criteria to justify when investing in a high P/E stock. The company should have had good historical earnings, be well-respected in the respective industry, has exceptional growth opportunities and a strong management team.

What about low P/E stocks? Picking up stocks with low P/Es generally indicate better bargains. Some believe that stocks with low P/Es are undervalued and thus, they are "cheap". It is true that companies with low P/E could provide good returns in the future. These companies tend to have more aggressive sales in the growing smaller markets as compared to larger companies which are usually found in matured markets.

Normandy is of the view that low P/Es do not necessarily indicate cheap stocks and that stocks with high P/Es are not necessarily as expensive as they appear.

Nevertheless, one thing for sure is that a company's P/E is heavily dependent on its growth prospects and the risks associated with its future performance. Wise investors certainly will have to do more homework and compare the market price with the intrinsic or true value of the stock.

Making sound investment decisions requires far more than evaluating the P/Es. There are other aspects that you should consider when investing in stocks. To sum up, using the P/Es as a guide to your investment may be confusing but it is useful in helping you make good investment decisions.

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Reproduced with permission from Normandy Services Sdn Bhd, Email:nassb@po.jaring.my Tel:603-4695560 Fax:603-2945561