To The Moon

Hello, tigers. @Tiger_chat told me that you wanna know when to buy the stock.

Today, I'd like to introduce an indicator help you tell whether a stock is cheap or expensive - P/E & Forward P/E.

1. How can we tell if a company's stock price is expensive or cheap?

I bet most investors have seen the word valuation.

P/E is a kind of valuation indicator and tells us whether a stock at its current market price is expensive or cheap.

• Price to Earnings Ratio or Price to Earnings Multiple is the ratio of share price of a stock to its earnings per share (EPS).

P/E represents how many years it takes to return the capital you invested. Therefore, the lower the P/E, the more cost-effective the investment is. The most common one used by analysts is PE-TTM.

P/E (TTM) is calculated as the stock's current price, divided by a company's trailing 12-month EPS.

We can find P/E of a company on Tiger Trade app: 

You can find it on the upper side of the k-line --> click "Analysis" --> find "Valuation Analysis"

You can tell from the chart that the current P/E of $Tesla Motors(TSLA)$ is 34.77.

• But what's the meaning of this figure? Does it mean high or low, expensive or cheap?

We can compare this number to its peers (the sector average) or compare it to itself (the historical performance).

Analysts often say a stock's valuation dropped to a historical low.

2. How can we know P/E is low or high? - Percentile

The PE percentile is a table that counts the historical P/E of a listed company.

The lower the PE percentile, the lower the P/E is compared to the majority of historical P/E. Then it means that the stock is cheaper and has a higher potential for future growth.

Generally speaking, a percentile 

• below 20% is called undervaluation;
• at around 50% is considered moderate valuation;
• above 80% is called overvaluation.

In Tesla's case, its percentile is only 4.62%, which is significantly lower than its historical data.

3. How can we know the future stock price moves?

Forward P/E is a version of the ratio of price-to-earnings (P/E) that uses forecasted earnings for the P/E calculation.

Two Formulas For Comparison:

P/E TTM = Current stock price/ trailing EPS

Forward P/E = Current stock price / estimated EPS

You can also find Forward P/E on Tiger Trade app:

As a good investor, how should you use the forward P/E?

Many analysts on Wall Street believe that a good forward P/E should be lower than the current P/E ratio.

A good lesson to learn is to look for companies with forward P/E that are 25% or more below their current P/E and whose stock prices continue to grow at a healthy rate.

4. Risk warning

After reading this article, you may think that I'm encouraging you to bottom Tesla? No.

I want to remind you that P/E is a last indicator for you when you decide to buy a stock.

The steps to begin a trade are: 1. Figure out the macro environment ---> 2. Analyze an industry situation ---->3. Find a healthy company in this industry

Although Tesla's valuation is ultra-low, it's unknown to us whether its stock price will drop or not. In 2023, if the rate hike doesn't stop and the used-car segment inflation remains high, Tesla's stock price still has room to fall.

An indicator can help you understand the company and the market. But you can't rely on it.

If you want to learn about other indicators, you can tell me or @Tiger_chat. 

Welcome to leave your opinion in the comment section!