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Warning: Do You Know Your P/E Ratio?

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  • (0:45) - Understanding P/E Ratios: Breaking Down Funko
  • (9:50) - Tracey’s Top Picks Using P/E
  • (22:20) - Episode Roundup: FNKO, LEN, TSLA, W, GIII


Welcome to Episode #233 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.

Many value investors look for cheap stocks using a Price-to-Earnings ratio, otherwise known as the P/E ratio.

But do you know which P/E ratio you’re looking at?

Trailing Versus Forward P/Es

If you looked at the P/E ratio for toy company Funko (FNKO - Free Report) on YahooFinance, you would see that it is 180x.

Shares are up over 90% year-to-date.

It sure sounds like that stock is expensive, right?

But YahooFinance uses the trailing P/E ratio on its summary page, which looks at last year’s earnings.

Other financial sites, like, using the forward P/E, which looks at analyst estimates of 2021’s earnings.

Funko’s forward P/E is just 23.

That’s a big difference if you’re trying to decide if the stock is “expensive” by looking at the P/E ratio.

Watch Earnings This Year

With many companies seeing depressed earnings in 2020 due to the COVID pandemic, the P/E ratios are going to be less reliable, depending on which ones you are looking at.

1.       Lennar (LEN - Free Report) has a forward P/E of 9.5 which is similar to its trailing P/E ratio of 10.4. Shares are up big but the forward P/E is lower because earnings are expected to rise about 40% this year.

2.       Tesla (TSLA - Free Report) seems to be crazy expensive, with a trailing P/E ratio of 1132. But earnings are expected to rise 90% year-over-year and the shares have gone up just 2% in 2021 which puts the forward P/E at just 167.

3.       Wayfair (W - Free Report) was a pandemic winner in 2020 and earnings soared. But earnings are expected to fall 53% in 2021. Wayfair’s trailing P/E is 169 but the forward picture is cheaper, at 138x.

4.       G-III Apparel (GIII - Free Report) really got hit in 2020 with earnings dropping significantly. On YahooFinance, it has a trailing P/E ratio of 65 which makes it seem expensive. But with earnings expected to rise 223% in 2021 as shoppers buy more dresses and jeans, it has a forward P/E on Zacks of just 13. That’s dirt cheap.

What else do you need to know about the P/E ratio and finding “value” stocks?

Tune into this week’s podcast to find out.

[In full disclosure, Tracey owns shares of FNKO in her personal portfolio.]

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