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Do P/E Ratios Even Matter Anymore?

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  • (0:45) - How Does P/E Impact A Stock?
  • (5:20) - Finding Value Within A Specific Industry: Tracey’s Top Picks
  • (16:50) - Episode Roundup: AMZN, FB, PINS, SNAP, TWTR, MSFT, TSM, AVGO, MU, INTC, AMAT, CTSH, GM
  •                 Podcast@Zacks.com

 

Welcome to Episode #220 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio, shares some of her top value investing tips and stock picks.

With growth stocks continuing to rally, the average P/E ratio of the major indexes like the S&P 500 are looking stretched.

The S&P 500 is trading with a forward P/E of 23 yet stocks continue to rise.

What if we’ve entered a new era of investing where P/E ratios don’t really matter?

What if looking for value stocks using the P/E ratio was out of date?

Is Amazon a Value Stock?

Amazon (AMZN - Free Report) is one of the most popular stocks on the Street but if investors had waited for Amazon’s P/E ratio to be low, i.e., a “value”, in order to buy it, they would still be sitting on the sidelines because Amazon has never had a value P/E.

Just 6 years, ago, in 2015, Amazon’s P/E was as high as 1362.

In 2008, it fell as low as 30x during the Great Recession.

But that’s the closest investors got to Amazon being a classic “value” stock.

It’s currently trading with a forward P/E of 69.

That may seem incredibly high, but that’s an 11-year low for the stock.

On a pure P/E basis, Amazon isn’t cheap. But based on its historic valuation, an investor could argue that it IS a value.

This is the cheapest an investor could buy its earnings in 11 years.

Finding Value Compared to Peers

Value isn’t derived solely from a P/E, P/S or P/B ratio. Those are only components of screening for “classic” value.

Value can also be found in a company that is trading more cheaply than its peers.

Take a look at Facebook (FB - Free Report) .

It has a forward P/E of 24.8. That’s a 2-year low.

Facebook traded as low as 21x in 2019 and at just 17.8x in 2018 when there were concerns about privacy.

But how does it stack up against its peers?

What’s the Cheapest Social Media Stock?

Snap (SNAP - Free Report) has a forward P/E of 235 as it’s finally expected to see positive earnings in 2021. But in 2020, it’s P/E was still negative as analysts expect it to lose $0.09 a share.

Twitter (TWTR - Free Report) is trading with a forward P/E of 47 as it, too, is finally expected to see positive earnings in 2021 with analysts looking for earnings of $0.96 per share after losing $0.72 a share in 2020.

Even Microsoft (MSFT - Free Report) , which owns LinkedIn, is trading at 32x forward earnings.

That makes Facebook among the cheapest of the social media stocks even though its P/E ratio is not at a level that would normally be thought of as a “value.”

What else do investors need to know about the P/E ratio and value investing?

Listen to this week’s podcast to find out.

[In full disclosure, Tracey owns shares of AMZN, FB and MSFT in her personal portfolio.]

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