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Strategies & Market Trends : Fidelity Select Sector funds
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To: Julius Wong who wrote (3461)3/4/2001 9:01:50 AM
From: Julius Wong  Read Replies (2) of 4916
 
On P/E ratio

In engineering we build models and gather information by examining the models. This is a simple model on P/E ratio.

A former high growth stock was traded at 120 times P/E last year, now beaten down to 30 times P/E. For simplicity (the advantage of a model) let the earnings be $1, then the stock was $120, and now $30. Is the stock a good buy at $30 with a P/E of 30?

Question: is $30 still matched with P/E 30? What if the earnings of 2001 be only $0.70? In that case the P/E will be 43, not 30. Then the stock is not $30 and P/E 30, but $30 and P/E 43. What will be the growth rate of this stock? Will the growth rate justify the 43 times P/E?

I may want to see the 2001 earnings before making decesion to buy the stock. If many people all waiting to see the 2001 earnings, there will be fewer buyers in 2001. Then the stock price may not move up much in 2001 due to less demand.
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