So you're saying that if someone is prepared to pay 10 - Ten (!) - times -more- than a company's earnings then that must be a fair or "lenient" share price to pay for its stock ?
And if a stock is trading at for example, 2 times earnings (P/e = 2) then it's _got_ to be CHEAP right ?
Or if it is trading at 20 or 30 times P/e then it is too expensive.
Heh.
Do you pause to wonder why a stock may be trading at such low P/e's like 2 in the first place ? or why it would be trading at 20 or 30 P/e for the current year ? Are you sure that a P/e of 2 is cheap and P/e's of 30 are expensive ? :)
Here's a hint: Who and/or what controls the "P" in P/e on a daily basis ? And how often do brokers publish updates of a company's earnings ?
P/e is a stupid indicator of value because it is based on the premise of efficient market hypothesis ie. the assumption that the "market" must know what a stock is worth at any time.
Nothing is further from the truth.
Because if that was true, it (the market) would never get it wrong, ever. And that companies always publish to-the-minute data, and that the market would never ever overbuy or oversell anything ! - God forbid the market, in which you apparently abdicate fiscal reponsibility, commit such an atrocity ... eventhough at any moment it is comprised of dimwits, guessers, gamblers, brokers that get it massively wrong, hedge funds that absolutely don't care WHAT the price is, scalpers, automated trading systems, Financial Review subscribers, idiotic commentators, numerically illiterate people, etc.
Does this market (which determines the ``P'' component in the "P/e" which you used to calculate value), sound like it can deliver an objective, rational and accurate valuation ?
Haha.
No.
Price is what you _pay_.
Value, is what you _get_.
People use P/e because they're lazy. Unfortunately in the long term it doesn't work. Why ? Because short term, the market is a "voting" machine. In the long term however, the market is a _weighing_ machine.
You should refer DCF, CAPM or some equity based pricing model.
If you think that "The valuation's fair price is simply estimated earnings times target P/E." then you are sorely mistaken, and have a long way to go before you understand how to calculate a business' value.
GTP Price at posting:
0.0¢ Sentiment: LT Buy Disclosure: Held
