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Ok, what's the magic P/E number?
Topic Started: Jul 20 2005, 07:36 AM (268 Views)
Jolly
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Geaux Tigers!
Since I have the opportunity to buy a little stock at 85% of current market value, should I be concerned about a 17:1 PE ratio? (Note: Earnings increased over 7% last year).

Is there a magic number that you walk away from a company, no matter how large, or well funded?
The main obstacle to a stable and just world order is the United States.- George Soros
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Buxtehude
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Umm... It depends. On a lot. Most saavy folks would agree that there isn't any magic number.

But 7% growth? That's a bit on the slow side... Unless there's dividends involved as well.
Sister, they don't know what to do with one of me.

-- Riddick
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Phlebas
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Bull-Carp
If you're buying at a 85% of market value, you could adjust the price earnings ratio to reflect the discount. However pe is a metric you use for a lot of things. pe and earnings growth are two of many metrics you should look at.
Like Buxtehude said, it depends.
Random FML: Today, I was fired by my boss in front of my coworkers. It would have been nice if I could have left the building before they started celebrating. FML

The founding of the bulk of the world's nation states post 1914 is based on self-defined nationalisms. The bulk of those national movements involve territory that was ethnically mixed. The foundation of many of those nation states involved population movements in the aftermath. When the only one that is repeatedly held up as unjust and unjustifiable is the Zionist project, the term anti-semitism may very well be appropriate. - P*D


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FrankM
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Wish I could give you a simple answer Jolly. In brief, what the market will bear in P/E is dependent on both the mood of the times and whether the company is in a presently fashionable growth industry. 17 is not far off the long term P/E averaged over all stocks, both “value” and “growth.”

Remember one of the key issues with selecting a stock. The stock price and therefore P/E at a given time represents the consensus of the market. You pick a stock not based on its absolute value but rather on your judgment that the consensus is wrong, that is, that the consensus has undervalued the stock. That implies you (legally) know something the consensus doesn’t.
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dolmansaxlil
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HOLY CARP!!!
Remember the teacher from the Peanuts cartoons? For me, that's exactly what reading this thread is like:

Blah blah blah blah blah stock blah blah blah value blah blah market blah growth blah blah blah blah. Blah blah index blah blah blah blah dividends blah blah.

Someday I'll have to get someone to try to explain it to me. But that might mean admitting I'm a grown up...
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jon-nyc
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Cheers
It also depends on the stock (and the industry).

If its a promising biotech company with a history of innovation, that sounds cheap. If its an auto company, run away.
In my defense, I was left unsupervised.
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Jolly
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Geaux Tigers!
jon-nyc
Jul 20 2005, 11:20 AM
It also depends on the stock (and the industry).

If its a promising biotech company with a history of innovation, that sounds cheap. If its an auto company, run away.

Let us just say that it's in the healthcare sector....
The main obstacle to a stable and just world order is the United States.- George Soros
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jon-nyc
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Well, thats below the average P/E of the S&P 500, and heatlcare is certainly a growing industry. With no more informaiton to work on, I'd say it doesn't sound expensive given the market conditions, so if I had a chance to buy it at 85% of the market price, I'd probably do it.

Especially if you can sell it in a reasonable time period.
In my defense, I was left unsupervised.
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FrankM
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Jolly,

Given the limitations of really knowing someone via this medium, I'd recommend that you at least consider a low fee mutual fund like Vanguard Health Care (VGHCX) rather than a single health stock, despite the fact you're in the health industry.

From what I recall, you have children entering or in College. Unless you intend to invest a relatively small amount, I question whether you should position yourself so high on the risk curve despite the higher reward possibility.
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