P/E = Price divided by earnings…
Historic P/E = The P/E multiple averaged over it’s lifetime
Current P/E = Current Price divided by LAST 12 months…
Future P/E = Current Price divided by next 12 months PROJECTED earnings… We know what happens when you miss earnings…
Example…
Stock Price = $150
Earnings last year per share is $10
Current P/E is 15.0 which is on par with the historical P/E for the stock.
Recession is announced and a huge selloff occurs with a 50% drop in the stock price since the market is only willing to pay 10 times earning for this stock during recession…
Stock now has a price of $100
Thus, P/E = $100/$10 = 10.0
Can we say that this stock is “cheap” because it trades lower than it’s historical average P/E? On the surface, the answer seems so…
Consider, that during the recession, the company has a terrible Q1 (and the homebuilders will) their estimates of $10 per share (which is for the year, so divide by 4 for the quarter = $2.50) and finish up with $1.68 per share for the quarter (about $6.70 for the year). Let’s see what that does to the P/E…
$100/$6.70 = P/E of 14.9 which is equal to the historic P\E, but now we are in a recession!
As you saw in the first drop, the market is more comfortable with a P/E of 10.0 during a recession…
Selloff occurs, the stock you bought at $100 now drops back to a P/E multiple of 10.0 which means the stock price is now $67…
You now lost 33% of your money at the drop of a hat…
skinnej, do you believe that once the media starts covering an issue then that issue has already ocurred? TIME putting recession on its’ latest cover is what I am referring to.
skinnej, do you believe that once the media starts covering an issue then that issue has already ocurred? TIME putting recession on its’ latest cover is what I am referring to.
I know what you are asking and sometimes that has merit. For a normal recession that last 8-12 months, an official "recession" isn't declared until 2 quarters of GDP results. By that time, we are already 6+ months into the recession. Since the market looks forward 6 months, then you can say that it's likely that what you are saying would be true...
But, I am not placing my bets that this will be a normal recession. I am placing my bets that the economy will be pretty weak for at least the next 2 years. If you are careful, you can play money on both sides of the rallies, but it’s a dangerous game.
My confidence is at an all time low right now. And your boy Pete on Options Monster likes to say, “when in doubt, palms out”… To me, the risk of getting crushed exceeds the risk of mission out on a few rallies…
When we get some great news and the volatility starts to die down, then I will move back in slowly. I’m not ready to jump back in. Also, I would like to see a double bottom on the bear market. It might not ever do that, but if it does then I will probably take on some more risk.
Boy Pete sure called the spike in volatility last week, and I mean worldwide! Thank goodness our markets were closed for MLK day.
Volatility has backed off some but don’t you think that it has hit a double top already? Look at the 37 level reached 8/16/07 and 1/22/08.
My boy Pete also says that pigs get fat but hogs get slaughtered. I’ll take what I can get right now short term. I agree there needs to be some caution for the next 6 months. BUT…I think if the emerging markets take off again it will spur the international business in a lot of US companies (CSCO, XOM, HON, CAT) and that could help offset the decline in domestic sales.
Bear markets will rally. Check out the chart of the DOW from 2000 to 2003. That’s kind of what I am scared of. Also, you can’t count on emerging markets. They are “old news” now and risky. If they start to slow, everyone get’s a kick in the nuts. You’ve also heard the old phrase, “Whey the USA coughs, the rest of the world catches cold”. Also note that USA makes up 2+% of China’s GDP.
When I hear some stabilizing news for the economy, then I will step back in. GDP is 0.6 when economists expected 1.1 and non-farm jobs drop and we are still rallying??? Smells like a bull trap to me.
But hey, I hope you are right, the sooner we can get through it, the sooner we can make more money. I picked up Feb 16th INTC options last month and they are in the green. Hopefully the stock has a nice move. I’m not totally out of the market, but I am not ready to jump back in totally.
As an inetresting excercise keep your portfolio statements from right before you moved out of the market. Pull them out 5 years from now and look to see where you would have been if you had done nothing. Compare that to where you actually are on that same date.
Might be more fun to do it at the end of each 12 months.
skineej, I hear ya about when the US coughs, but what do you make of the possible de-coupling between the US and other markets? With the Olympics China is demanding a huge supply of the world’s oil, steel and commodities. I realize once the Olympics are over there will be a slump, but with 1/6 of the world’s population they make up a nice slice of the global consumer market. Add to that India and now you have 1/3 of the world’s population and a gigantic emerging middle class with more money than their parents ever could dream of. Education increases. Infrastructure increases. Real estate increases. Soon the world might sneeze and give us a cold!
FYI, just heard this week was the best percentage gain week in 5 years. Bear trap? Entirely possible.
FYI, just heard this week was the best percentage gain week in 5 years. Bear trap? Entirely possible.
Expect a bunch of profit takers Monday and into Tuesday!
Skinnee,
If I were jumping back to the market now, It would be in raw materials and mining. IE heavy industry which is fueling the China boom. What’s your take on that.
Give a man a fish and he will eat for a day. Teach a man to fish and he will sit in a boat and drink beer all day. FISH 24/7------------ 25 Grady w/ a couple of Gas Guzzling 175 Johnsons “O-SEA-D” the old “Havanadaydream”
yea, look at some of the earnings lately. Potash has been just killing it. Plus the BHP - Rio Tinto deal is heating up with more global money moving into this sector.
FYI, just heard this week was the best percentage gain week in 5 years. Bear trap? Entirely possible.
Expect a bunch of profit takers Monday and into Tuesday!
Skinnee,
If I were jumping back to the market now, It would be in raw materials and mining. IE heavy industry which is fueling the China boom. What’s your take on that.
Give a man a fish and he will eat for a day. Teach a man to fish and he will sit in a boat and drink beer all day. FISH 24/7------------ 25 Grady w/ a couple of Gas Guzzling 175 Johnsons “O-SEA-D” the old “Havanadaydream”
don't forget trasportation, like DRYS... got to get those goods to China somehow...
Fred W.
Romans 1:16
“I’d like to see Congress subject to random drug tests!!” -Sir Skirtchaser
For your answers, you have to ask… WWBD (What would Buffet do)? When you talk about raw materials and mining, it sounds like you are chasing wall street. Buffet would never do this. He would be looking at stocks that he likes for the long term that mercilessly got drug down by the short term market timers. What non-speculative, good companies that have been growing earnings year after year have you wanted to get into but still have a great competitive advantage? You have to do the research and make sure that they have very little to no debt and mucho cash in the bank to get them through any recession. Companies with big debt and little cash in the bank are asking to die during a recession. I still like GRMN at this price. But you have to understand that any investment that you make during this time is going to require you to have a tough stomach. The number one rule (that I have broken many times and paid for it) is don’t invest with any money that you need in the next 5 years.
Also, be careful about what wall street is recommending. They already have their money in the stock. All the mining stuff, gold, etc is all overplayed. It’s too early for financials, Bond Insurers, and home builders. Sure, some of these will survive and be plentiful. I’m not saying all will fail, but some will go bankrupt which leaves you holding shares valued at $0 if you are in the wrong one.
Also, my speculative small cap pick is DBTK. I think that they have a strong story and with such a small market cap, they are asking to be bought out. They announce earnings after the closing bell. I am already in this stock, but if I wasn’t, I probably wouldn’t start a position today. I would wait until after earnings. I have no clue what they will report. For my sake, I hope it’s good, but even good news in this market just gives you temporary gains and then profit takers take you back down as soon as you rise.
Also, be very careful. The next few days are BIG. It looks like the rally is nearing a technical short te