P/E number

[mbell97]

What is a good P/E number? Alot of the companies I have found have P/E's around 15. Am I correct when I say "A higher a P/E the better. Google's is 42 and msft is 18 so i am guessing the higher the number the better. Please help me out. Thanks a lot.

[sweeps]

Re: P/E number

Not correct. A lower price/earnings ratio is better -- either the stock price is lower or the company's earnings are higher.

However, a P/E ratio alone doesn't say much. There are a lot of other factors that go into whether a company's stock is worth buying. Google's 42 may be a better buy than Microsoft's 18 if you anticipate that Google will continue to grow by leaps and bounds while Microsoft just maintains flat growth.

[kv968]

Re: P/E number

P/E is the price-to-earnings ratio (market value per share/earnings per share). A higher P/E doesn't necessarily mean a company is good. A high P/E shows that investors are expecting higher earnings growth from a company than one with a lower P/E. The best way to use the number is to compare companies in the same industry (as you have with Microsoft and Google). If you use it to compare Exxon to Google, it won't be of much use.

As an example, Microsoft has a P/E of 26 and Google's is 48. To put it simply, investors are willing to pay $26 dollars for every $1 of current earnings that Microsoft will generate whereas $48 to every $1 for Google. Growth companies (ie. tech) normally have higher P/E's than value companies (ie. utilities).

As with any number though you can't rely on P/E alone when judging a company since through accounting procedures or recent activity within the company, the "earnings" part of the ratio may not properly reflect the whole story. However it's a good number to quickly compare companies of the same industry. Also, the P/B (price-to-book) number is another good ratio to compare as it shows the companies stock price relevant to it's total assests.

[kv968]

Re: P/E number

Not correct. A lower price/earnings ratio is better -- either the stock price is lower or the company's earnings are higher.

I beg to disagree. A lower P/E isn't necessarily better. It depends on what you're looking for in a stock. If you're looking for a "safer", slower growing stock then lower is better but if you're looking for a riskier, possibly faster growing stock then a higher P/E is better.

[mbell97]

Re: P/E number

ok thanks guys that sort of clears things up. I am learning to do my "homework." I buy mostly utilities and REITS and reinvest the div. in a DRIP program. I use to just look at a couple of things but now I am trying to learn more. I am thinking of investing in EAS, which IMO is a bargain right now, and also into MO. I don't plan on touching the money for 20 or 25 years and just let the div. roll over every quarter while also put in small amounts every other month or so. Thanks again and any other advice you are willing to give would be greatly appreciated. Alot of the discussion boards I have found are mainly day traders and they give a lot of advice for long term holders such as myself. thanks again.

[kv968]

Re: P/E number

ok thanks guys that sort of clears things up. I am learning to do my "homework." I buy mostly utilities and REITS and reinvest the div. in a DRIP program. I use to just look at a couple of things but now I am trying to learn more. I am thinking of investing in EAS, which IMO is a bargain right now, and also into MO. I don't plan on touching the money for 20 or 25 years and just let the div. roll over every quarter while also put in small amounts every other month or so. Thanks again and any other advice you are willing to give would be greatly appreciated. Alot of the discussion boards I have found are mainly day traders and they give a lot of advice for long term holders such as myself. thanks again.

You're welcome. Homework is the name of the game. Unfortunately there's no one "magic number" to look at as I'm sure you're realizing. However with comparing some different data and ratios of stocks or funds that are in the same industry you can at least get a better view of where the company stands.

And also, just so you know, MO will spinning off all the shares they hold of Kraft foods on March 30th (distribution date). If you invest with Altria on or before March 16th (record date) you will receive about 0.7 shares of Kraft for every share of Altria you hold. If you want to hold just shares in Altria common stock they will be offering that as stock ticker "MO wi" sometime before the record date and through the distribution.

[kv968]

Re: P/E number

One other thing. I take it these stocks are held in a taxable account. Do you have an IRA or 401k set up?

[mbell97]

Re: P/E number

well I am a teacher so I have a 403b that I contribute too, but I have not set up an a ROTH yet. I have been trying to decide on whether or not to open one. I already have 9 companies that I have DRIPs set up with so its really easy to just send money in to them each month. And I am not exactly sure on how to trade within a ROTH or who to use. Thinking about sharebuilder.com to use.

[Ima saver]

Re: P/E number

You don't trade within your roth.

[kv968]

Re: P/E number

well I am a teacher so I have a 403b that I contribute too, but I have not set up an a ROTH yet. I have been trying to decide on whether or not to open one. I already have 9 companies that I have DRIPs set up with so its really easy to just send money in to them each month. And I am not exactly sure on how to trade within a ROTH or who to use. Thinking about sharebuilder.com to use.

I would definitely say without a doubt open a Roth if you qualify (make less than $160K if married filing jointly or $110K if single or married filing separately). The money grows tax-free and distributions at retirement are tax-free. With DRIPs you're paying taxes on the dividends and will have to pay capital gains taxes when you sell them. Basically you can "trade" within a Roth just by sending money in as you do with DRIPs. You would mostly be buying mutual funds however if you have a brokerage account with the IRA holder company you could also purchase stocks. A Roth is just a designated account where the funds or stocks are held.

IMO I would stay away from sharebuilder as a place for a Roth because of the brokerage fees. Here's a link discussing sharebuilder:

http://www.savingadvice.com/forums/showthread.php?t=24412

You might want to look into Vanguard, T Rowe Price or Fidelity and use their no-load funds as a way to go. There are many discussions about them on these boards so if you get a chance check them out. If you have any questions about them feel free to ask. Me and many of the others are more than willing to give our 2 cents

[humandraydel]

Re: P/E number

You don't trade within your roth.

What does this even mean? Sure you can - and do, unless you just keep your Roth in cash, which is silly IMHO.

As for sharebuilder, it has it's uses. It's main use is not dollar cost averaging ETFs monthly like you may want to do in a Roth. It's better for larger lump sums of money where the transaction fees are not such a large % of the investment.

That said, I actually have my Roth in a sharebuilder account. I throw money in there every month and when it reaches at least $1000 I'll buy a stock or ETF. In that way, the $4 transaction cost is only 0.4% of the investment - slightly more than a Vanguard index fund.

[sweeps]

Re: P/E number

I beg to disagree. A lower P/E isn't necessarily better. It depends on what you're looking for in a stock. If you're looking for a "safer", slower growing stock then lower is better but if you're looking for a riskier, possibly faster growing stock then a higher P/E is better.

If you read my entire post, you would see that I said there are other factors that have to be considered. That a P/E ratio is not enough information.

Having said that, all things being equal, a lower P/E is better than a higher P/E. I stand by my statement.

[autoxer]

Re: P/E number

That said, I actually have my Roth in a sharebuilder account. I throw money in there every month and when it reaches at least $1000 I'll buy a stock or ETF. In that way, the $4 transaction cost is only 0.4% of the investment - slightly more than a Vanguard index fund.

The Vanguard index funds don't have transaction costs. I don't think you should compare a stocks transaction cost to an index mutual funds expense ratio. Unless you are trying to replicate the index by buying all of the stocks within the index.

[mbell97]

Re: P/E number

ok lot of good information here and I really appreciate it. I read and reread everything and decided to go a head and open a ROTH with Sharebuilder.com. I have my reasons for choosing them. Now here is the next question that has come to my mind. Do you think it would be smart to sell my shares that own of EPR for example. I have them through the company so I was thinking I could sell all of the shares and go ahead and pay the taxes on it now and then deposit the money into my ROTH and buy back all that I can with the money. Then I will never have to pay taxes on it again. Is this a good idea to do with all of my companies up until i hit the maximum for this year? thanks again for the help.

[sweeps]

Re: P/E number

I have my reasons for choosing them.

Because you get an account bonus perhaps?

I was thinking I could sell all of the shares and go ahead and pay the taxes on it now and then deposit the money into my ROTH and buy back all that I can with the money. Then I will never have to pay taxes on it again. Is this a good idea to do with all of my companies up until i hit the maximum for this year?

Normally yes. However, a couple exceptions to this might be (a) you have plenty of other investable cash to hit the Roth maximum and don't need/want to sell your taxable stock holdings or (b) you may benefit by not selling your stock holdings immediately. For example, maybe you could wait for capital gains rates to kick in, or you want to offset gains with a loss next year, etc.