Good Stocks at a Good Price: If the anticipation of greater earnings ahead is correct

Over many decades, the average P/E ratio for common stocks has hovered around 15 times trailing 12-month earnings. In the late 90s it was higher than 15; in the dismal 70s it was lower. Like most growth-oriented stock pickers, I prefer to look at forward earnings - for the current fiscal year now in...

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Bibliographic Details
Published in:On Wall Street 2004-10, p.1
Main Author: Quickel, Stephen W
Format: Article
Language:English
Subjects:
Common stock
Earnings
Earnings per share
Growth rate
Growth stocks
Presidential elections
Ratios
Stock exchanges
Stock prices
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Summary:Over many decades, the average P/E ratio for common stocks has hovered around 15 times trailing 12-month earnings. In the late 90s it was higher than 15; in the dismal 70s it was lower. Like most growth-oriented stock pickers, I prefer to look at forward earnings - for the current fiscal year now in progress or, better still, for the next fiscal year. What every stock investor wants to know is what a company and its shares will be worth two or three years down the road. The further ahead you can look with a reasonable degree of accuracy, the better. And as I said, my 125 stocks showed an average year-ahead P/E of 18 in mid-August versus 22 six weeks earlier. As regular readers know, I use PEG ratios to calculate the true valuations of growth stocks. By dividing a stock's long-term growth rate into its P/E, I come up with a P/E to Growth, or PEG, ratio. An ideal PEG is one-to-one, expressed as 1.00. The 125 stocks on my recommended list sport an average PEG ratio of 0.95, a shade better than the so-called ideal. The average stock in the S&P 500 had a PEG of 1.36 at the market's mid-August interim low. That's a big improvement from the 1.6 of June 30, and the 1.65 of last January. But it is nowhere near as attractive as the 0.95 average PEG of my list of growth leaders.
ISSN:1092-1370