Note: Earlier today- we sent out a note to our clients bringing their attention to the strong action we are seeing in a slew of financials. To access that information and find leading stocks, right now.
We have all heard that it is important to buy under-valued stocks. Well, how do you define if a stock is properly valued or not? The most common definition is to use what is known as the Price to Earnings Ratio or P/E Ratio. The P/E ratio is a commonly used valuation ratio that is calculated by dividing the current stock price by its earnings per share (EPS). Normally, the P/E ratio for the S&P 500 is in the mid teens and varies greatly for individual stocks. The P/E ratio is the most common way to quickly determine how a stock (or the market) is valued. Typically, an expanding P/E is considered healthy and a good thing for investors.
A common example to illustrate how the P/E ratio is calculated would be: if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).
There are a few ways you can calculate the EPS ratio. By far, the most common way is to use the last four quarters (a.k.a. trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (a.k.a. projected or forward P/E). A third way is to take the sum of the last two quarters and then use the estimates for the next two quarters.
- Financials ETF (XLF): 9.72
- Citigroup (C): 11.33
- JP Morgan (JPM): 13.34
- Goldman Sachs (GS): 11
- Wells Fargo (WFC): 12.1