Okay, here's another simple earnings based metric and rule that I am working with now and trying to develop and understand. That is, I'm trying to figure out if it's worthwhile as a screening tool -- a way for me to exclude stocks - or at least get me to consider more carefully before I buy something.
It is a simple comparison of p/e ratios now versus projected by analysts.
We know analysts earnings projects vs. actual are often, maybe mostly incorrect, even allowing for some standard deviation in estimate. Just take Meredith Whitney vs. all the other Citigroup analysts. Or any of the analysts who've predicted last year what AIG might earn this year.
The thing is, in most cases, could we at least assume that if a number of analysts are following a stock, that the average of their earnings projections at least gives the correct DIRECTION of what earnings would do? There's a case to be made that no, the average of analysts' earnings guesses is apparently (if I recall the studies) wrong about the direction of earnings one year out. But I wonder if I look at enough stocks and enough estimates and focus only on what analysts predict are worse earnings next year, that I might be right to use that to censor (remove) such stocks from my potential buys.
So here is the rule (comments welcome):
Using the Yahoo Key Statistics page for a stock, the third item is trailing p/e (ttm), and the next item is forward p/e (with the date), the rule is: Do not buy any stock where the forward p/e is HIGHER than the trailing p/e number.
Contrawise (or whatever the correct word is), if the forward p/e is LOWER than the current p/e, then one can continue researching the company.
Based on this comparison of earnings (p/e's), like this for NVS,
finance.yahoo.com
the following companies pass this screen and allegedly might have lower p/e's (higher earnings) next year (or corporate year-end) than now:
NVS, MSFT, PEP, NKE, JNJ
The following companies have analysts who believe (or report anyway) the companies will have higher p/e's (lower earnings) next year than currently. So maybe - if this simple p/e comparison could actually be accurate and encompass all that's necessary to evaluate a company and predict the future - the stocks could be/might be/should be passed by:
GRMN, MMM, COH, CSCO
Again, just a simple thing I'm playing with. Maybe be a general rule that works for somebody, or a way to screen, or could be just something that might help me slow down my buying. Or maybe it's worthless. Maybe, like all general rules, it might work sometimes and sometime not. Anyway, I'm attuned to it, and I'm looking at the comparison for every stock I'm interested in.
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(Fwiw, I am holding small positions in CSCO, MMM, JNJ, MSFT, PEP) |
