Lower-priced stocks are still there for the picking on the current stock market because price-to-earnings ratios, a primary measurement for valuing companies, is still lagging the rising tide of the S&P 500, according to a Reuters article.
“The benchmark has doubled its performance since the low it hit in March 2009. Despite those gains, P/E ratios are still hovering well below historical norms, according to data from S&P Capital IQ,” Reuters says.
“As of the close of trading on December 17, the trailing 12-month operating P/E of the S&P 500 was 14.1, or 21 percent less than the median trailing P/E of 17.9 since 1988. Forward earnings for the next 12 months are trading at a greater discount, too — at less than 13 times.
“‘Those are substantial discounts,’ says Sam Stovall, chief equity strategist for S&P Capital IQ. ‘If the S&P 500 were trading at the median P/E of the last 24 years, it should be at 1,750 right now.’ It currently stands around 1,430.”
Reuters posits a few reasons why the price may be right on some stocks:
“The first interpretation is that valuations are on the low side because of a basket of temporary factors: U.S. budget wrangling, European debt troubles, a potential hard landing in China. Assuming those events pass, and P/Es eventually revert to the mean, it could signal a buying opportunity for value-oriented investors.
“The other interpretation is more worrisome: That something more systemic is going on, and that we could be in for an extended era of lower-than-normal P/E ratios.”
But stock buyers who do their research can still find good companies despite unsettling economic news.
Michael Morris, vice president and portfolio manager with Philadelphia-based Delaware Investments, tells Reuters a couple of his favorites are tech giant Qualcomm (QCOM) and pharmaceutical company Gilead Sciences (GILD).
If you want to learn more about Qualcomm, BetterInvesting is offering members a free online stock study on the company on Wednesday, Feb. 6, from 8 p.m. to 9 p.m. Suzi Artzberger, BetterInvesting’s information technology director, will lead the study. See http://www.betterinvesting.org/oss for more information and to sign up.
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