Sinking Importance of the PE Ratio or so They Say
Interesting article from the Wall Street Journal that summarizes our frustration with the current market. Rather though being the death of the Price to Earnings Ratio (or PE) the markets will likely look back in 5 to 10 years and wish they'd paid attention. Corporate profits are at record levels and companies with low PEs are likely to outperform in the next decade. Especially when considering the PEG ratio or the growth component of the earnings. Companies with growth rates higher then the PE will undoubtedly outperform. In the markets eyes though, the question remains on how to determine which companies will outperform. Some of the winners like Salesforce.com (CRM) have already soared to outlandish PEs because market has deemed their growth as transformational. The market thinks CRM will grow rapidly even in a weak economy so they've priced in the growth. Other stocks are marred with low PEs and reasonable growth estimates that have a low risk of not exceeding a 6-8 PE. ...