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In short, these stocks normally have the potential to meet growth expectations.
But what about speculative stocks on the second board with very high P/Es? Should
one invest in them?
Probably not! Some of the stocks have been pushed by speculators to levels beyond
what they are actually worth. Some speculative stocks on the second board are traded
purely on rumours by local punters and it is hard to justify the value of the stock.
Last year, some of the smaller companies' P/Es on the second board were valued at
more at 400x their earnings. Would you believe them?
Analysts normally look for certain criteria to justify when investing in a high P/E
stock. The company should have had good historical earnings, be well-respected in
the respective industry, has exceptional growth opportunities and a strong management
team.
What about low P/E stocks? Picking up stocks with low P/Es generally indicate better
bargains. Some believe that stocks with low P/Es are undervalued and thus, they are
"cheap". It is true that companies with low P/E could provide good returns
in the future. These companies tend to have more aggressive sales in the growing
smaller markets as compared to larger companies which are usually found in matured
markets.
Normandy is of the view that low P/Es do not necessarily indicate cheap stocks and
that stocks with high P/Es are not necessarily as expensive as they appear.
Nevertheless, one thing for sure is that a company's P/E is heavily dependent on
its growth prospects and the risks associated with its future performance. Wise investors
certainly will have to do more homework and compare the market price with the intrinsic
or true value of the stock.
Making sound investment decisions requires far more than evaluating the P/Es. There
are other aspects that you should consider when investing in stocks. To sum up, using
the P/Es as a guide to your investment may be confusing but it is useful in helping
you make good investment decisions.
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