Your Financial Future: Price earnings rations demystified
Last week we discussed what was happening in the stock market with Game Stop.
The price per share has come down dramatically from the crazy highs during the short squeeze. The hedge funds have covered their short positions so there is no need for them to buy stock. The current price per share is probably not justified by the fundamentals of the company financial performance. Once investors realize that very few people are interested in the stock, the price will most likely fall as people begin to sell to reposition their investments.
Price earnings ratios are a measurement of a stock蘑菇视频 earnings per share compared to the stock price. It is sometimes used to get an idea if a stock is priced right. Historically, P/E ratios were often in the neighborhood of 15 times earnings. If you thought a stock was exceptionally good you would accept a little higher P/E and if less desirable, maybe a little lower.
Would you be interested in a stock that on Dec. 7 had a P/E ratio of 92.84? That means at current earnings it would take over 92 years to get back your investment. All of this return would have to come from capital gains since this stock pays no dividend. This stock is one you may have heard of before. It was Amazon.
How about another technology company in the transportation business: Uber. They are great if you travel a lot. They are quicker and less expensive than using a taxi. They started a new division a couple of years ago to deliver food, Uber Eats. I recently read that they bought a company to deliver alcohol to homes for $1.1 billion. They do not own the vehicles that make their deliveries, only the technology. Since they were founded in March 2009, they have never made a profit. They have no price earnings ratio, yet their market price keeps going up.
Tesla has become one of the highest valued companies in the world. Their stock is worth much more than Ford, General Motors and Chrysler combined although they sell a fraction number of vehicles as the big three. Last year, Tesla made a small profit for the first time in its existence.
A recent study found that there was only one other time in the history of the stock market that P/E ratios were higher than today. That was in 2000 during the DOT.com era. This was followed by two corrections. In 2002 the market went down 47.54%, and in 2008 the market went down 53.40%. It took almost 12 years to recover the losses.
Since then, the market has gone almost straight up on a 12-year bull run. At the end of 2010, the DOW was 11,559 and at the end of 2020 it was 30,015. All we hear on the news every day is how poor the economy is doing and we need to go in debt substantially more to get the economy straightened out. Something does not add up. While Wall Street says earning are going up, they are nowhere near levels to support these values. Someday there will be a reversion to the norm.
Not all of stocks have fared this well but it is hard to believe that we might not be in some kind of a bubble. Many people are concerned and nervous about the situation, but they are afraid if they take some of their money out of the market, they will miss the next jump up. Someday, reality will step in. Greed could make a lot of retirements much less desirable than people imagine.
Next week, we will discuss the money cycle and which investors can take the risk.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, 鈥淵our Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.鈥� If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.