Dear Fellow-Investor.
Whenever the stock markets have consolidated and broken down significantly, thousands of bargain hunters are on their way to try and find the one dirt cheap stock in the hope of cashing in large profits once it goes up again!
But when exactly is a stock cheap? For many investors a stock is only cheap when the price-earnings ratio (P/E ratio) is low. So the lower the price-earnings ratio the better it is for them on speculations that it will go to where it was before the stock dropped, if it goes up again.
To recap. A price-earnings ratio shows the multiple of earnings at which a stock sells. Determined by dividing current stock price by current earnings per share (adjusted for stock splits). A higher multiple means investors have higher expectations for future growth, and have bid up the stock’s price.
The thing about P/E ratios is that conservative investors should avoid stocks with a high P/E ratio because if these corporations disappoint with their earnings and dont meet market expectations, the stock will drop dramatically like Whole Foods did dropping more than $20 at the beginning of November 2006.
If a stock...
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