What is a P E Ratio and Why Should

What is a P/E Ratio and Why Should I Care? Allen Holdsworth Illowa Buy States Chapter BIVA Board Director Classes-To-Go

BETTERINVESTING NATIONAL CONVENTION Disclaimer • The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured in the seminar materials are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by Better. Investing™ National Association of Investors Corporation (“BI”) or the Better. Investing Volunteer Advisory Board, its volunteer advisory board (“BIVAB”). The views expressed are those of the instructors, commentators, guests and participants, as the case may be, and do not necessarily represent those of Better. Investing™ or BIVAB. Investors should conduct their own review and analysis of any company of interest before making an investment decision. • Securities discussed may be held by the instructors in their own personal portfolios or in those of their clients. BI presenters and volunteers are held to a strict code of conduct that precludes benefiting financially from educational presentations or public activities via any Better. Investing programs, events and/or educational sessions in which they participate. Any violation is strictly prohibited and should be reported to the President of Better. Investing or the Manager of Volunteer Relations.

BETTERINVESTING NATIONAL CONVENTION Understanding P/E Ratios • • • Presented by: Allen Holdsworth Illowa Buy States Chapter-Director BIVA Board-Director Teach 16 week Personal Investing class at community college

BETTERINVESTING NATIONAL CONVENTION What is a P/E Ratio? • It is NOT gym class • No need to get all sweaty • You can figure out P/E ratios even if you can’t walk and chew gum at the same time!

BETTERINVESTING NATIONAL CONVENTION What is the P/E Ratio? • The P/E ratio is the price per share of stock divided by the earnings per share of stock • The question is - which earnings are used?

BETTERINVESTING NATIONAL CONVENTION Understanding P/E Ratios • P/E Ratio means: • Price per share divided by the earnings per share from the last 4 quarters • This is the trailing P/E • Price changes every day • Earnings per share only changes each quarter

BETTERINVESTING NATIONAL CONVENTION Understanding P/E Ratios • Value Line uses current P/E--Use the last 2 quarters plus the next 2 quarters in the future • Future P/E uses the projected earnings over some future time period

BETTERINVESTING NATIONAL CONVENTION P/E Ratios • The P/E ratio is the amount of money someone is willing to pay to get $1 of earnings • It could be considered a popularity contest • In general - the faster a company is growing, the higher the P/E it will have

BETTERINVESTING NATIONAL CONVENTION P/E Ratios • What makes the P/E change? • The future growth prospects are the driving force in price and P/E

BETTERINVESTING NATIONAL CONVENTION P/E Ratios • What is a good P/E or a bad P/E • Is a P/E of 20 good or bad? • It depends!!!! – Look at past history of P/E ratios – Look at other companies in same industry – Look at average P/E for S&P 500 – Look at the prospects for the company

BETTERINVESTING NATIONAL CONVENTION P/E Ratios • In general, the faster a company grows - the higher the P/E ratio • As the growth of a company slows over time - the P/E ratios will usually come down

BETTERINVESTING NATIONAL CONVENTION P/E Ratios • Different types of industries tend to have different P/Es - even if the growth rates are similar • Part 3 of the Stock Selection Guide helps us determine the normal range of high and low P/E

BETTERINVESTING NATIONAL CONVENTION P/E Ratios- Pulte Homes

BETTERINVESTING NATIONAL CONVENTION P/E Ratios-BUD

BETTERINVESTING NATIONAL CONVENTION P/E Ratios- BBBY

BETTERINVESTING NATIONAL CONVENTION Section 3 - Apple Computer

BETTERINVESTING NATIONAL CONVENTION XM-How do you make an estimate?

BETTERINVESTING NATIONAL CONVENTION P/E Ratios in Section 3 • Eliminate outliers - can see the last 10 years of P/Es on Toolkitclick on avg. high or avg. low P/E box in Section 3 • P/E expanding - use average • P/E shrinking - use most recent or even lower • Max. high P/E of 30 (1. 5 times growth rate or sometimes 2 times

BETTERINVESTING NATIONAL CONVENTION P/E Ratios • Don’t buy a stock just because the P/E ratio is low • Do more research - try to discover why it is low • There may be bad news and it deserves to be low • The future growth prospects are the real driving force

BETTERINVESTING NATIONAL CONVENTION P/E Ratios • There are 7 basic ways a company can increase earnings – Reduce costs – Raise prices – Open more stores/expand – Sell more in existing markets – Fix or sell losing operations – Buy back shares – Lower taxes paid

BETTERINVESTING NATIONAL CONVENTION Understanding P/E Ratios • References: from Better. Investing: – Stock Selection Handbook – Using Portfolio Management Wisdom

BETTERINVESTING NATIONAL CONVENTION Make A Difference In Someone’s Life If you have benefited from BETTERINVESTING, Please pick up some BETTERINVESTING materials and introduce others to this opportunity.