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A PE ratio of 30 for a value stock? You have got to be kidding me. Average PE ratio for the SP500 was about 15 until the pandemic.
by baskethead 4y ago
A PE ratio of 30 for a value stock? You have got to be kidding me. Average PE ratio for the SP500 was about 15 until the pandemic.
- nostrademons 4y agoIt's all dependent on interest rates, because that sets the discount rate that all investments are compared to. A P/E of 30 is an earnings yield of about 3% (1/30). A steady cash-flowing stock will compare favorably to any bond with an interest rate of < 3%. When bonds are yielding < 3%, that's a good deal. A P/E of 15 is an earnings yield of about 6% and change. When rates are in the 6% range, this is fairly valued. A P/E of 6-10, like what was considered good in the late 70s, is an earnings yield of 10-18%. Sure enough, in the late 70s when you could actually get these P/Es, interest rates were around 18%. There's math behind these rules of thumb. It all comes down to discounted cash flow analysis - if you understand the inputs that go into that formula, what the market does makes a lot more sense.
- baskethead 4y agoExcept that's not how the markets work. Historically the PE ratios were much lower and the rates were much higher. Your model doesn't even work 5 years ago.
- bb88 4y agoTech stocks should be around 30 right now, due to expected growth. 10/15 is (at least what I consider) the expected for normal stocks.