4 ms·

P/E is NEVER useless. For instance, if a company misses on earnings, then maybe it was an outlier - an odd quarter of sorts. But if you do it a few times over,

by MR4D 7y ago

P/E is NEVER useless. For instance, if a company misses on earnings, then maybe it was an outlier - an odd quarter of sorts. But if you do it a few times over, then you are not the growth company you thought you were, and your 100:1 p/e will come crashing down to join everybody else (albeit maybe on the high side) somewhere in the upper 20’s or in the 30’s. But here’s the key - to do that, a stock would have to lose TWO THIRDS of it’s value. So a really high p/e signals really high growth expectations, and when a company isn’t growing at that expectation, the law of gravity again takes control and it will fall back to earth. Ignore it at your own peril.

jjeaff 7y ago
But you are assuming that the end goal of the company and purpose of buying the stock is to participate in "earnings" in the form of dividends. But that is no longer the MO of many public companies now. The goal appears to just eternally grow the stock price and allow share holders to cash out in the form of appreciated shares which get a preferable capital gains tax treatment. Occasional earnings are just there to prove to the market that you could make money if you wanted to. Amazon has never paid dividends and probably never will unless their shareholders are able to convince them otherwise. To take it even further, there are additional tax advantages to capital appreciation for the wealthy that hold Amazon stock. They can even choose not to sell appreciated stock but instead get low interest loans using their stock as collateral. Buy stock - let it appreciate - increase your line of credit - live off the borrowed money that has a lower interest rate than the stock price growth rate - continue until death - let estate sell the stock and take a one time tax hit.
- kgwgk 7y ago
  You are the one conflating dividends and earnings. Even if a company chooses to reinvest retained earnings instead of returning cash to investors [1] it’s good to be profitable. Not just “to prove that you could”, but to avoid being just a money-burning machine (not Amazon’s case, mind you; they do not have “occasional earnings”, they’ve been consistenly profitable for the last 15 years). [1] Either through dividends or through buybacks. The second option has some advantages relative to dividends and results in capital gains for the investors that choose to sell.
- MR4D 7y ago
  First, capital gains and dividends have basically the same tax treatment (not identical, but close enough for anyone holding for longer than a year). Second, a company’s market capitalization can only grow in one of two ways: increase in the P/E ratio, or increase in earnings. Of the two, the latter is more sustainable, and less susceptible to market downturns. Dividends are just the percentage of earnings a company pays out to its shareholders for various reasons (I’ll skip the myriad of reasons for brevity). The best measure of sustainable value creation is ROIC (Return On Invested Capital). Most people don’t use it because it’s not a readily available statistic and it’s not easy to calculate. But for the long term, I don’t know of anything better. Still, p/e is important.
  - jjeaff 7y ago
    >First, capital gains and dividends have basically the same tax treatment (not identical, but close enough for anyone holding for longer than a year). No, that's not correct. If you are being paid a dividend, whether it be qualified or not, that money is double taxed. Once at the corporate earnings rate and then again to you personally at capital gains rate. As a shareholder, whether that tax all comes out of your pocket or not, doesn't matter. Your increase in value is effectively taxed at 60-70%. But that is not the case if the company you invest in, rather than retaining earnings to pay dividends, reinvests into growth or other capital expenditures or keeps large sums of untaxed money in overseas accounts. Thus continually pushing the stock upwards. And allowing investors to make their own choices about cashing out. Be it by selling shares of getting loans using the stock as collateral. Why in the world do you think Apple has $250B in cash, a full quarter of their total market cap, mostly stashed away in tax free zones? It is for the simple reason that people can invest and get that money reinvested for them all without ever having to sell or take a distribution and then get taxed before using it or reinvesting it yourself.
    - MR4D 7y ago
      Go back and read what I said. Better yet, read Schwab’s tax summary here: https://www.schwab.com/public/schwab/investing/retirement_and_planning/taxes/current-rates-rules/dividends-capital-gains-tax-brackets https://www.schwab.com/public/schwab/investing/retirement_an... My statement is correct.

by MR4D 7y ago

jjeaff 7y ago

But you are assuming that the end goal of the company and purpose of buying the stock is to participate in "earnings" in the form of dividends. But that is no longer the MO of many public companies now. The goal appears to just eternally grow the stock price and allow share holders to cash out in the form of appreciated shares which get a preferable capital gains tax treatment. Occasional earnings are just there to prove to the market that you could make money if you wanted to. Amazon has never paid dividends and probably never will unless their shareholders are able to convince them otherwise. To take it even further, there are additional tax advantages to capital appreciation for the wealthy that hold Amazon stock. They can even choose not to sell appreciated stock but instead get low interest loans using their stock as collateral. Buy stock - let it appreciate - increase your line of credit - live off the borrowed money that has a lower interest rate than the stock price growth rate - continue until death - let estate sell the stock and take a one time tax hit.

kgwgk 7y ago
You are the one conflating dividends and earnings. Even if a company chooses to reinvest retained earnings instead of returning cash to investors [1] it’s good to be profitable. Not just “to prove that you could”, but to avoid being just a money-burning machine (not Amazon’s case, mind you; they do not have “occasional earnings”, they’ve been consistenly profitable for the last 15 years). [1] Either through dividends or through buybacks. The second option has some advantages relative to dividends and results in capital gains for the investors that choose to sell.
MR4D 7y ago
First, capital gains and dividends have basically the same tax treatment (not identical, but close enough for anyone holding for longer than a year). Second, a company’s market capitalization can only grow in one of two ways: increase in the P/E ratio, or increase in earnings. Of the two, the latter is more sustainable, and less susceptible to market downturns. Dividends are just the percentage of earnings a company pays out to its shareholders for various reasons (I’ll skip the myriad of reasons for brevity). The best measure of sustainable value creation is ROIC (Return On Invested Capital). Most people don’t use it because it’s not a readily available statistic and it’s not easy to calculate. But for the long term, I don’t know of anything better. Still, p/e is important.
- jjeaff 7y ago
  >First, capital gains and dividends have basically the same tax treatment (not identical, but close enough for anyone holding for longer than a year). No, that's not correct. If you are being paid a dividend, whether it be qualified or not, that money is double taxed. Once at the corporate earnings rate and then again to you personally at capital gains rate. As a shareholder, whether that tax all comes out of your pocket or not, doesn't matter. Your increase in value is effectively taxed at 60-70%. But that is not the case if the company you invest in, rather than retaining earnings to pay dividends, reinvests into growth or other capital expenditures or keeps large sums of untaxed money in overseas accounts. Thus continually pushing the stock upwards. And allowing investors to make their own choices about cashing out. Be it by selling shares of getting loans using the stock as collateral. Why in the world do you think Apple has $250B in cash, a full quarter of their total market cap, mostly stashed away in tax free zones? It is for the simple reason that people can invest and get that money reinvested for them all without ever having to sell or take a distribution and then get taxed before using it or reinvesting it yourself.
  - MR4D 7y ago
    Go back and read what I said. Better yet, read Schwab’s tax summary here: https://www.schwab.com/public/schwab/investing/retirement_and_planning/taxes/current-rates-rules/dividends-capital-gains-tax-brackets https://www.schwab.com/public/schwab/investing/retirement_an... My statement is correct.