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That’s why individual investors can only stick to the strategies that work for them and not worry about market timing. The difficulty is that there is no way to tell when the PE ratio for the stock market will adjust. Lower PE ratios equal better investment returns and this relationship holds through each twenty year period. 10-year PE ratio for the US stock market since 1890. The following chart from Professor Shiller plots annualised returns vs. The below table from GuruFocus shows what can be expected when the PE ratio is at various levels: That’s not a particularly good sign for today’s investors, since it means stock markets will either have to drop in price, or earnings will have to shoot up significantly. However, Robert Shiller, the nobel laureate economist from Yale University likes to use the cyclically adjusted PE ratio instead (known as CAPE) and this gives a historical PE ratio of 16.6.Īs you can see from the historical chart below, it’s obvious that at the time of writing the stock market is expensive, since it is trading well above it’s average. It’s lowest ever recorded PE ratio was 5.31 (in 1917) and it’s highest ever PE was 123.73 (in May 2009). The stock market as a whole (measured by the S&P 500) has had an average PE ratio (throughout it’s history) of 15.54. Historically, stocks have averaged a PE ratio between 15 and 20 and if you look at a large database of companies you’ll find that most stocks sit within this range. Historical PE ratios & stock market performance And one of the most famous value investors of recent times, Peter Lynch, was known to make good use of the PE ratio in his analysis.
#Annual pe ratio dps 2013 amigobulls professional#
In fact, a study by Merrill Lynch found that 33% of professional investment managers consider the PE ratio before investing in a company. Even though the PE ratio is simple, it’s an amazingly useful tool.
#Annual pe ratio dps 2013 amigobulls free#
PE ratios still provide comps to peer groups, but they do not represent free market fair value anymore.The price-to-earnings ratio, or PE ratio, is one of the simplest but most popular financial ratios for estimating the value of a stock. Multiples can increase based on fabricated demand even if earnings growth does not warrant the higher valuation levels. The PE Ratio alone does not reveal fair value.įair value is what someone is willing to pay, they say, and that is true, but in a time of free money and stimulus the willingness to pay more may also be skewed. The PE ratio simply reveals how many times earnings an investor is willing to pay, or that a shareholder is willing to maintain.
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The higher the PE multiple the more expensive a company may be, but that is not always true. However, the fact remains that a PE ratio reveals how much an investor is willing to pay for the earnings of a company at any given time. Instead of comparing historical averages, investors today use peer groups to compare PE multiples for individual companies because those stocks often trade in the higher PE spectrum that exists in today’s environment. This is often referred to as the multiple of a stock, and when groups, markets, or sectors are defined the multiples of all the stocks in those groups can be averaged to define average PE multiples as well.Īverage PE multiples have been popularized in recent years because historical comparisons make current valuations look stretched. The PE Ratio chart for Dr Pepper Snapple Group, (DPS) is a valuation observation.Ī PE Ratio is a price to earnings ratio that has historically helped investors define fair value.