Looking for a bargain? You don’t have to look far. You don’t even have to leave the comfort of your home and travel to the department stores. Nor is there any online shopping involved.
Sales at the moment can be found not on New York’s Fifth Avenue or on London’s Oxford Street but on Wall Street where stocks are now selling for a percentage of their recent prices.
The Dow Industrials had dropped 588.40 points or 3.6%, at the beginning of the week, ending the day at 15871.35, its lowest closing level in 18 months. The S&P 500 dropped 77.68 points, or 3.9% to 1893.21 and the Nasdaq Composite fell 179.79 points, or 3.8%, to 4526.25 for the same trading session.
But these deals didn’t last long.
By the end of the trading day on Wednesday, the markets had totally turned around with prices that marked the single biggest gain since 2011. The Dow Jones closed at 619 points, the third-highest point increase in its history while the S&P 500 was up 72.90 points to 1,940.51 an increase of 3.90% and the Nasdaq edged higher 4.24% or 191.05 points to 4,697.54.
Sales at the moment can be found not on New York’s Fifth Avenue or on London’s Oxford Street but on Wall Street where stocks are now selling for a percentage of their recent prices.
These are still rock bottom prices and they offer a perfect opportunity for investors to jump in to the market at full speed. But most people will probably miss the boat as they continue to look only at the share price and disregard other vital factors that come into play when investing in a company.
P/E Ratios
Stocks are evaluated in many ways but the most basic measure of a stock’s worth involves the company’s earnings, namely its price/earnings ratio which divides the share price by the company's annual net income. An example of this would be a company whose annual net income is $2 and the stock is trading for $20. This would then have a P/E of 10.
P/E ratios have historically averaged in the mid-teens. However, the last few years have seen P/E ratios higher than the broader market. In general, stocks with higher P/E are thought of as expensive, while lower-P/E stocks are considered cheap.
Inexpensive stocks are not necessarily the best stocks to buy however and P/E ratios are not the only factor to look at when considering a stock purchase.
Other Ratios
Other relationships are used to measure the value of a stock. These include the dividend yield, price-to-book and, sometimes, price-to-sales ratios. These simple ratios position the stock price against the other measurement and investors often use them when trying to determine if a stock has a better value if its yields are higher than the overall market. These figures are listed on stock tables so investors can view them before making a purchase.
A stock's price/earnings growth ratio or PEG is used to determine a stock's value while taking the company's earnings growth into account. It is often considered to provide a more exact picture of the company than the P/E ratio. A company may have a high P/E ratio and the stock looks like a good buy, but factoring in the company's growth rate to get the stock's PEG ratio often gives a different picture. A low PEG ratio indicates a stock that is undervalued when viewed with its earnings performance.
Analysts suggest that the PEG should be at least 10 percent higher than the year before and this rate should be maintained over several years.
Return on Equity
The ROE, return on equity, is another indicator of a stock’s value and it measures a corporation's profitability by showing how much profit a company generates with the money invested. It is the amount of net income returned as a percentage of shareholders equity and is a useful tool for comparing the profitability of a company to that of other firms in the same industry. The ROE should also be increasing at an annual rate of at least 10 percent according to these same analysts.
The recent gyrations in China have unsettled the global markets and analysts are not predicting when the end will come. There is a general sense, however, that stocks will somehow find a floor someplace in the middle. According to these analysts, stocks are still not so cheap that they will draw value-minded investors back into the fold but neither are they that expensive that they will be put off altogether.
Investors are already willing to pay more for companies that are expecting strong earnings growth. Market analysts are expecting S&P 500 earnings to fall 3.3 percent from a year ago in the third quarter making even less-expensive stocks still overpriced.
This all leaves bargain seekers in somewhat of a dilemma. To wait for stock prices to drop again or jump in now and hope their high-priced shares will continue to go up.
