PE ratio

[stephen]

Well, here is that same list with sector information.

Unfortunately, "Real Estate" is rather broad, and so is "Diversified Financials". A more fine-grained culling has to be done by hand - which I may yet do.

return yield
ABP 73% 8% Real Estate
LEP 378% 16% Real Estate
PMV 108% 80% Food & Staples Retailing
AEZ 1508% 13% Real Estate
AAH 67% 47% Pharmaceuticals & Biotechnology
PEM 71% 22% Materials
APZ 138% 11% Real Estate
ASX 86% 4% Diversified Financials
MIG 77% 22% Transportation
AEU 240% 8% Real Estate
AFI 262% 5% Diversified Financials
AUI 974% 5% Diversified Financials
AUW 131% 6% Diversified Financials
BJT 228% 11% Real Estate
CND 63% 15% Commercial Services & Supplies
SMY 61% 15% Materials
IGO 197% 14% Materials
CWP 189% 10% Real Estate
AIX 367% 13% Transportation
CHC 168% 4% Real Estate
CHO 101% 4% Diversified Financials
PSA 90% 12% Energy
IFM 79% 12% Software & Services
COU 122% 5% Diversified Financials
CPK 457% 18% Real Estate
CMW 286% 10% Real Estate
DRT 496% 16% Real Estate
DVN 62% 11% Real Estate
DUI 741% 5% Diversified Financials
DJW 2614% 9% Diversified Financials
EQT 82% 4% Diversified Financials
EZL 95% 9% Diversified Financials
EBB 95% 3% Diversified Financials
GJT 69% 6% Real Estate
VGH 67% 9% Health Care Equipment & Services
GOW 66% 10% Diversified Financials
GPT 68% 7% Real Estate
HFA 211% 5% Diversified Financials
CXP 74% 9% Commercial Services & Supplies
HHL 110% 7% Diversified Financials
JST 63% 9% Retailing
SGN 139% 8% Media
IIF 212% 11% Real Estate
IOF 509% 22% Real Estate
LNN 66% 8% Food Beverage & Tobacco
LLC 70% 8% Real Estate
REF 196% 8% Telecommunication Services
MCW 124% 21% Real Estate
MDT 722% 24% Real Estate
NOD 62% 8% Capital Goods
AEO 162% 7% Media
MOF 351% 25% Real Estate
MND 60% 7% Capital Goods
MLT 85% 4% Diversified Financials
MMS 148% 7% Commercial Services & Supplies
MIR 809% 11% Diversified Financials
MGR 64% 8% Real Estate
MIX 255% 12% Real Estate
NCK 66% 7% Retailing
MPF 278% 10% Real Estate
MAFCA 98% 13% Real Estate
CPU 106% 7% Software & Services
ALL 92% 6% Consumer Services
PGA 90% 6% Media
PPC 75% 6% Real Estate
PPT 92% 7% Diversified Financials
PMC 63% 6% Diversified Financials
SSM 113% 6% Capital Goods
WTP 64% 6% Capital Goods
PFG 243% 6% Diversified Financials
SKI 566% 5% Utilities
RRT 1541% 9% Real Estate
CAB 69% 5% Commercial Services & Supplies
RAT 375% 12% Real Estate
RJT 96% 7% Real Estate
DWS 88% 5% Software & Services
SMX 58% 5% Software & Services
RKN 70% 5% Software & Services
SHL 4836% 5% Health Care Equipment & Services
WES 80% 4% Food & Staples Retailing
IPN 84% 4% Health Care Equipment & Services
NXS 80% 4% Energy
TPX 63% 8% Diversified Financials
TGG 107% 5% Diversified Financials
COH 115% 4% Health Care Equipment & Services
BVA 122% 3% Software & Services
SEK 246% 3% Commercial Services & Supplies
TSO 473% 35% Real Estate
TGP 109% 13% Real Estate
TRG 102% 10% Diversified Financials
TCQ 74% 5% Real Estate
IDL 110% 3% Capital Goods
VPG 270% 5% Real Estate
WTF 115% 3% Retailing
WOR 71% 3% Energy
REA 15442% 2% Media
NCM 188% 2% Materials
WHF 140% 7% Diversified Financials
AAX 59% 1% Capital Goods
PSD 555% -79% Pharmaceuticals & Biotechnology

[Lizard]

Thanks Stephen... that makes for a much more useful starting point! I don't think the measure would be particularly helpful for resource stocks (I hold IGO and trade SMY though and I quite like PEM...so perhaps it does work for these too. Lol!) or pharma-bio/developing companies (I hold AAH though). However, there are a few interesting ones there - DWS I've picked up on screening before and liked, but never actually bought. Also SGN and CND. Own BJT and CMW of the property trusts, but not sure where they bottom...only beginning to get close to fair value I think. Actually, the more I look, the more I recognise as being ones I've already looked at for various reasons...

OldRider - I follow your posts on CGVI!

[Lizard]

Re earlier discussions on P/E multiples vs EBIT multiples, I note from some analyst reports that the move towards EBIT comparisons seems to be gathering even more strength from the current uncertainty around debt-rollovers. i.e. analysts are uncertain about timing and magnitude of likely sharp changes to interest costs and are therefore are choosing to take them out of the equation when looking at comparative multiples.

[stephen]

In the last couple of years I've looked hard at quite a few tech companies. A common factor in ones that have become recently successful is that they pay little or no tax, owing to previous losses. When you start looking at their likely performance once they've used up their tax losses they don't look so good...

[Snoopy]

Here's a few of my thoughts on valuation:

In current market circumstances where good companies are getting trashed when earnings growth does not fulfill sharemarket expectations, I think it is appropriate to take another look at elements of Liz's valuation list.

Consideration of the balance sheet is essential to any form of valuation - buying "value" alone is likely to direct you into distressed businesses or situations where existing equity is more likely to be diluted. It also misses companies that are positioned to invest in explosive growth.

Buying a share on any one (and only one) indicator is always going to get you into trouble in the end.

If by buying 'value', you mean buying just because a share price is low, or PE is low, I would agree. But I wouldn't agree with 'value' being measured on a one dimensional scale. So I can't agree that 'value' companies are likely to be distressed, or likely to need new equity.

The one exception to this rule is companies that constantly need access to new capital to grow or even retain their current profitability. In that instance, and this includes all finance companies, a falling share price means 'stay away'.

Generally IMO a battered down share price is not a good indicator of a business in long term distress.

Buying 'value' will almost certainly see you miss out on buying companies poised for 'explosive growth' that is true. But value buying also protects the investor from the PE slashing that can halve or more a company's share price when 'explosive growth' is expected but not realised - on no change of *actual* earnings.

Thus I see missing out on buying those 'explosive growth' opportunities to be a good thing.

Valuation should always be forward looking. Seems obvious, but the temptation is to apply formulae which automatically generate a value based on historical data.

Valuation can demonstrate that buying a business with sustainable high levels of earnings growth will mean there is no price too high for a long term holder. This is a valid conclusion - but not always the most profitable thing to do in the short term.

So what you are saying here Liz is that to invest in 'explosive growth' opportunities you have to make up some growth factor (not use a historical projection) and it is very likely that, in so doing, you will convince yourself of the investment case? [since no buy price will be too high if your made up optimistic (why would you invest if you were not an optimist?) projection is right]

Valuation always needs to be considered in the light of market conditions. Profit margins of greater than 20% rarely last. And high returns on assets make a sector attractive for competition.

Just to make things perfectly clear, I believe you are talking about business market conditions not investor market conditions, vis a vis the current state of the sharemarket.

If that is what you mean I agree.

This is why I have balked at increasing my investment in Turner's Auctions over recent months. Not because I didn't believe in the ability of the company to manage its way out of difficulties. It was because I could see the overall second hand vehicle market was experiencing a 'dislocation shock' of a 'once in a decade' magnitude and I wasn't clear how the up until now business model would stand up in those conditions.

As it turned out my fears seem unfounded and I should have piled into the share as it traded under $1- arrrgh! Or perhaps not. At that stage the full year TUA result and business market outlook was not out. So I would have been taking a serious gamble if I had started buying at those sub $1 prices.

As always it is easy to appear clever if you have the benefit of hindsight. Sorting out 'share filters' in advance given you only have historical data to go on is much more difficult!

SNOOPY

[Lizard]

So I can't agree that 'value' companies are likely to be distressed, or likely to need new equity.

This thread referred to measurement of "value" using P/E and various associated ratios. I would suggest that if I screened the market for stocks and looked for the ones with the lowest P/E, P/S and Pr/NTA ratios (often considered to be measures of value) then I would find the top 10 (i.e. the lowest ratios) was heavily laced with companies that are either about to go broke or to re-finance with heavy dilution. So using these tools to screen stocks tends to get me into trouble unless I take my analysis alot further.

However, maybe in the lows of a bear market, these screening ratios will be more useful than in the picked over bones of an old bull.

Buying 'value' will almost certainly see you miss out on buying companies poised for 'explosive growth' that is true. But value buying also protects the investor from the PE slashing that can halve or more a company's share price when 'explosive growth' is expected but not realised - on no change of *actual* earnings.

And a share that looked to be on a low P/E can easily become a share with a high P/E if my analysis was wrong and the company's earnings decline. ALL shares that disappoint against predictions suffer accordingly, no matter whether they were previously in an uptrend or a downtrend; had a high P/E or a low P/E. If a growth stock turns out to be growing more slowly, then, so long as it continues to grow, it should eventually return my money with interest (assuming a neutral market). If a low/no growth stock turns out to be doing worse than expected, then that probably means that if I hold long enough, I will have nothing left.

So what you are saying here Liz is that to invest in 'explosive growth' opportunities you have to make up some growth factor (not use a historical projection) and it is very likely that, in so doing, you will convince yourself of the investment case?

Not necessarily. I could look at historical return on assets, combine with the balance sheet and payout ratio to determine a sustainable rate of possible growth as my "growth factor". Although this alone might fail me where there are changes in sectoral conditions, or where the business is subject to economies of scale. Or where the business model has changed.

(Whether or not I am easily convinced about the business case will probably depend on my mood, on who is suggesting it to me and on the number of drinks I have had).

[Snoopy]

This thread referred to measurement of "value" using P/E and various associated ratios. I would suggest that if I screened the market for stocks and looked for the ones with the lowest P/E, P/S and Pr/NTA ratios (often considered to be measures of value) then I would find the top 10 (i.e. the lowest ratios) was heavily laced with companies that are either about to go broke or to re-finance with heavy dilution. So using these tools to screen stocks tends to get me into trouble unless I take my analysis a lot further.

However, maybe in the lows of a bear market, these screening ratios will be more useful than in the picked over bones of an old bull.

I agree that Low P/E *could* mean a company is about to go broke or refinance with heavy dilution. However, there are other financial statistics you can check that will save you choosing a company with such a potential fate. I think to discard low P/E companies, because low PE 'might be bad' is wrong.

Here is a comprehensive reference on buying low P/E companies.

http://www.ftpress.com/articles/arti...70894&seqNum=3

From that particular page I reference, I quote the salient paragraphs:

----------

Low PE Stocks versus the Rest of the Market

Studies that have looked at the relationship between PE ratios and excess returns have consistently found that stocks with low PE ratios earn significantly higher returns than stocks with high PE ratios over long time horizons. Since some of the research is more than two decades old and the results vary widely depending upon the sampling period, it might be best to review the raw data and look at the longest period for which data is available.

Begin by looking at the annual returns that would have been earned by U.S. stocks categorized into ten classes according to PE ratios from 1952 to 2001. The stocks were categorized by PE ratios at the start of each year, and the total return, inclusive of dividends and price appreciation, was computed for each of the ten portfolios over the year.

On average, the stocks in the lowest PE ratio classes earned almost twice the returns of the stocks in the highest PE ratio classes. To examine how sensitive these conclusions were to how the portfolios were constructed, you can look at two constructs. In the first, equally weighted portfolios were created, and an equal amount of money was put into each firm in each portfolio. In the second, more was invested in the firms with higher market value and less in the smaller firms to create value-weighted portfolios. The results were slightly more favorable with the equally weighted portfolio, with the lowest PE ratio stocks earning an average annual return of 24.11% and the highest PE ratio stocks earning 13.03%. With the value-weighted portfolios, the corresponding numbers were 20.85% and 11%, respectively. In both cases, though, low PE stocks clearly outperformed high PE stocks as investments.

To examine whether there are differences in subperiods, let's look at the annual returns from 1952 to 1971, 1972 to 1990, and 1991 to 2001 for stocks in each PE ratio portfolio. Again, the portfolios were created on the basis of PE ratios at the beginning of each year, and returns were measured over the course of the year.

Firms in the lowest PE ratio class earned 10% more each year than the stocks in the high PE class between 1952 and 1971, about 9% more each year between 1971 and 1990, and about 12% more each year between 1991 and 2001. In other words, there is no visible decline in the returns earned by low PE stocks in recent years.

Thus, the evidence is overwhelming that low PE stocks earn higher returns than high PE stocks over long periods. Those studies that adjust for differences in risk across stocks confirm that low PE stocks continue to earn higher returns after adjusting for risk. Since the portfolios examined in the last section were constructed only with stocks listed in the United States, it is also worth noting that the excess returns earned by low PE ratio stocks also show up in other international markets.

--------

End quote

And a share that looked to be on a low P/E can easily become a share with a high P/E if my analysis was wrong and the company's earnings decline. ALL shares that disappoint against predictions suffer accordingly, no matter whether they were previously in an uptrend or a downtrend; had a high P/E or a low P/E.

Yes except that a stock with a low P/E has probably *already* disappointed the market. So there is less chance of a low P/E stock not meeting favourable market expectations. With a low PE stock, I am thinking of TUA as a recent particular example in my portfolio, they recently declared a net profit from continuing operations down some 25%. Following that declaration the share price promptly *gained* 25%, simply because although the result was bad, it wasn't as bad as people thought.

If you start on the bottom rung of the ladder, you often don't have as far to fall.

If a growth stock turns out to be growing more slowly, then, so long as it continues to grow, it should eventually return my money with interest (assuming a neutral market). If a low/no growth stock turns out to be doing worse than expected, then that probably means that if I hold long enough, I will have nothing left.

Most 'bad businesses' are cyclical. It is quite rare that a well capitalised business that is nevertheless operating in a difficult environment goes down.

I do tend to invest in low(er) PE shares myself. As an exercise I have done a bit of analysis on Scott Technology which I had thought of as a 'relatively low PE' share. However on going over my data I have found my idea was quite wrong. The PE, as at September 30th leading up to the annual result, has varied enormously from a low of 11.2 to a high of 200!

I therefore have the basis of a small study. I have only nine years of data points - not enough to claim any result really means anything. But I think you will find the results interesting nonetheless.

I have calculated the return on a year on year basis going forwards (capital gain and dividends) and got a percentage return. I have then compared the return with the market PE prevailing just before the year studied. The results are as follows:

Prevailing PE Ratio     Total Annual Return

       11.2                         +31.5%
       12.2                         -48.5%
       13.0                         +30.6%
       14.8                         +53.6%
       15.2                          +7.6%
       22.7                         -24.0%
       40.3                         +71.7%
      195                           -20.6%
      200                            -2.5%

This is not an absolutely clear cut picture. The very best result occurred when the PE ratio was 40.3 (high) and the worst result occurred when the PE was 12.2 (quite low). The overall picture, though, paints with the opposite brush. On 80% of occasions a low PE is the portent to a good investment result while a high PE is a strong indicator of doing badly. That does not contradict the premise that 'most of the time' - if you screen out the companies in trouble (an important qualifier) - a low PE investment will outperform a high PE investment.

SNOOPY

[Lizard]

I was looking back at this thread this morning and decided to go to more than a bit of trouble to try and see what would have worked as a selection tool back in December 2007...

So I've taken historical ASX data from Dec 2007 and put it alongside current and deleted any that don't match (which means anything that has substantially changed it's name, gone broke or been taken over). Then I ran a straight price comparison and deleted any obvious recapitalisations. Data is not going to be perfect, but should be enough to be interesting.

Anyway, some first off results....
Of 1822 shares that survived the data matching, there was an average loss in the 11 months of 53.6% (excl divs)..... considerably worse than the index move.

Only 75 shares or 4.1% had recorded an increase in share price. I called these the "gainers". Below is a table showing the difference in averages for a variety of parameters between the "gainers" and the "market"...



Perhaps surprisingly, the most significant difference between the gainers and the market averages is in P/E - with the average much higher for the gainers at the beginning of the measured period! ROE was much lower, as was yield. Pr/NTA was slightly better, but not considerably and has ended the year higher, while the ROE for the gainers is now consistent with the market.

The most notable point from this is that the market cap has gone up for "gainers", while P/E has fallen. The change in both these numbers can be used to calculate that the average change in earnings for the gainers was an increase of 104%! Earnings for the market as a whole must have fallen by an average of 6.4%.

I may try later to do some more manipulation of the data and see what other interesting facts fall out... (e.g. one noticeable feature in preparing the data is that the most comings and goings occurred in companies with names starting with "green"! )

(Note that the source data excludes extreme results from the calculation of averages, so the full data set may not have been included in any given average).

[Lizard]

Okay, just ran the comparison for Stephen's list from his Dec/Jan screening of the market based on "the Little Book that beats the Market"...

.... and, it didn't beat the market. (Though I doubt the results would pass a significance test given the wide Std Deviations. Distributions should be skewed anyway, given there is a downside limit of 100%)

Market average return = -53.6%
The LBtBtM = -61.8%

[Lizard]

It's interesting to look at Median results rather than averages...

Whereas the average loss for market was 53.6%, the median loss was actually 61.2%

More interesting - the median market cap for the ASX turns out to be radically different from the mean at a mere $34m, while the group of "gainers" were even more biased towards minnows, at a median market cap of just $16m.