4 Keys to Picking Great Stocks (Part 1 of 4)
First, let’s knock out the definition of Price to Earnings ratio. The formula is simply the stock price divided by the earnings per share (EPS). It basically tells you if the stock is cheap or expensive, but the answer to that question depends on your perspective.
The price to earnings ratio can tell two sides of the same story. It really depends if you call yourself a “Value Investor” or a “Growth Investor”
If you are a value investor, you believe that a low price to earnings ratio (or simply PE) means you are buying a stock at a discount. You typically don’t want stocks if their PE is over 25.
If you are a growth investor, the higher the PE the better. A growth investor says “if the stock is any good, then it will have a high PE because if people want to buy it, it will naturally drive up the price relative to its earnings”
I think the graph below is helpful.
I personally am a value investor, so I am looking for low PE. That is also what my Stock Picker screens for, along with 7 other aspects to get stellar gains. But not only that. Low PE is what Warren Buffett and his mentor, Benjamin Graham teach everyone. In fact they advocate for a PE of 15 or below.
Remember, that PE by itself cannot tell the whole picture of the health or future growth potential of a stock. Check out my Free Resources to find out more of my secrets to picking great stocks!