Investors Should Not Pay More Than A 15 P/E Ratio When Buying A Stock: Ben Graham | FAST Graphs
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- เผยแพร่เมื่อ 28 มิ.ย. 2024
- In this video, Chuck Carnevale, Co-Founder of FAST Graphs, a.k.a. Mr. Valuation will explain the concept of a P/E ratio as a valuation reference using FAST Graphs for evaluating stock prices. Chuck will demonstrate how the P/E ratio can help determine if a stock is trading at a fair valuation or not, and whether it is a good investment. He will provide examples and show how the P/E ratio can impact the rate of return. Understanding the P/E ratio can help you make informed investment decisions.
Here is a link to our research articles on the video/article Chuck references in the video:
fastgraphs.com/blog/why-a-15-...
Time Codes:
0:00 - Introduction by Chuck Carnevale, Co-Founder of FAST Graphs, a.k.a. Mr. Valuation
1:23 - Amdocs Ltd (DOX)
7:58 - Principal Financial Group (PFG)
11:36 - Target Corp (TGT)
14:12 - Ameriprise Financial Inc (AMP)
16:32 - Meta Platforms (META)
17:41 - Ecolab Inc (ECL)
17:57 - Automatic Data Processing Inc (ADP)
19:10 - Johnson & Johnson (JNJ)
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Disclaimer: FAST Graphs is a tool designed to reveal and present information related to financial data and investment metrics. It is not intended to provide specific advice or recommendations. Instead, it offers a comprehensive view of relevant data, empowering users to make informed decisions based on their own analysis. It's your first step to a more comprehensive research and due diligence process. In short, it is a tool to think with. The opinions in this video are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned.
#dividends #stocks #investing - แนวปฏิบัติและการใช้ชีวิต
Value is hard to come by these days. Market has gotten ahead of itself and we're going back to extreme greed. But there still are some opportunities overlooked by the marke and your tool is amazing to find them, Chuck.
To sum up: Buy above average businesses, for below average prices.
Pretty solid philosophy
Like Buffett always advises. Why take a huge risk when you have less risk and safety of return elsewhere? You can sleep tight at night.
Incredible video, thank you for another insightful video, Chuck... The wisdom of Benjamin G, Buffett and Munger will always live on through the best of all of us... You've knocked this one out of the park with this explanation, sometimes it really does require some waiting to find a value stock to add to the portfolio below p.e 15, but when there is an opportunity... investors better put their money to good use!
Thanks Chuck! Joel Greenblatt once did a speech where he referenced Ben Graham’s view on intrinsic value calling it a wavy line, and that if you do majority of buying below the line and majority of selling above the line you will do well
Hi Chuck, It sounds like your audio is coming through your webcam's microphone and not your dedicated mic in front of your mouth. Either that or you might want to test the settings on your mic. Your earlier videos have clear audio with a warmer tone.
Depends on ROIC, growth, runway for future growth, size of company. Earnings can be distorted by high rates of reinvestment for example, which is basically positive for compounding, especially when the company is less expensive based on cash flow.
Which is why FAST Graphs offers the opportunity to analyze stocks utilizing 3 earnings metrics, 2 cash flow metrics, EBITDA, and EBIT, as well as sales.
Thanks Chuck! I always find your videos informative and enjoyable.
Thank you for your content, you are an excellent teacher
you are delivering an absolute masterclass. I am grateful for your videos and lessons and tool, you have helped many people. you should make people pay for these lessons
Thank you for the kind words. You can pay me and simultaneously pay yourself by subscribing to FAST Graphs if you don’t already. FAST Graphs are my way of teaching people to fish rather than giving them a fish dinner. FAST Graphs empower people to apply the lesson that I have learned and trying to share.
Chuck you are the best!
Thanks Chuck-I learned a lot from this segment about P/E ratio and valuations.
I try to point out this to some of my friends...sad that they dont understand it yet. Does not help that, here in Portugal, barely no one invests - and the few who do have no concept of value investing.
Thank you for your Work!
Once again, fantastic content!!
Thank you, Professor! 😃
Thank you once again for great vid.👍
I think the 15 PE ratio is grounded on financial math rather than on historical market PE ratio. PE ratio implies a 6.7% rate of return (1/15) plus growth by inflation of 3% it's a 9-10% total return which is the historical return of the stock market. Which makes sense considering that US treasuries yielded on average 5%, so the stock market risk premium is 4% or 5% percentage points over the theoretically safest investment which is t-bills. I am not sure why the stock market risk premium has been around 4-5% though, but I am sure there is also some rational mathematical explanation.
Hey Chuck! Great video as always. Slightly OT question. I feel that the sound quality has been a bit off sometimes lately. This video and the last one (Food Stocks) sounds like they are recorded in a bathroom (ringing short echo) while the one just before them (Office REITs) sound just fine. I didn´t go back that far, but it seems to have started with the Packaged Food video from a month ago. Anyway, no big deal, just thought you should know. Cheers
Totally my fault, or recording software has changed and I did not change with it. Will try to do better
But you also have to subtract inflation from the expected return. Right? How would you do that?
Great video. I've always wondered what P/E = G means on FastGraphs. Now I think I finally get it. It means that ordinarily one would have a default of 15 as the standard P/E, below which is a buy, but with fast growing companies the P/E would rise to match the growth rate if above 15% EPS growth. Correct? To be honest I don't think the current explanatory box that comes up when the cursor pauses on that really explains this in plain English!
You are correct, famed investor Peter Lynch his best-selling book one up on Wall Street stated that a stock is at value when the P/E ratio is equal to the growth rate. However this only applies to fast-growing companies above 15% growth. It is 1 of 3 formulas we use
I always wondered if the 15 PE still applies. 1/15 is 6.5%. Graham lived in the time of GE and IBM, huge conglomerates. Hasn't the world changed in 100 years?
It does for most companies as evidenced by reviewing thousands on FAST Graphs. However, as pointed out the video faster growing companies will command different multiples such as Peter Lynch's P/E equal to growth for companies growing at 15% or higher. On the other hand, those are rare
It does not apply as much as in his time as stock market as whole does not trade at median PE 15 anymore. Since 1990 median is more around 18-20x earnings.
So if you are index investor than you wold buy only once in last 30 years basically. Only during GFC. Do you want to wait another 30 years to get chance to buy index or will be okay with paying PE 17? It is up to you.
You are generally correct, look at SPY on a FAST Graph normal P/E (average) is 18.586 2003. However, you are ignoring the principle of margin of safety which a 15 PE ratio would provide
Im not ignoring anything. Im just stating facts that since around 1985 stocks do not trade at median PE 15 anymore so it is increasily difficult to buy below PE 15. More like PE 18. Benjamin Graham surely came with that number 15 because it was the median in his time so it made sence to buy below median. Index investor who would buy SPY only below PE 15 would have few weeks in total to buy index below PE 15 in last 2 decades. Not everyone is willing to wait 10 years to buy index 2 PE cheaper while index 4x in meantime. It basically required the biggest recession in 80 years and once a century pandemic to reach PE 15 for the index. Otherwise no chance. Will we get another GFC to bring SPY under PE 15? Maybe and maybe not. I guess thats where Dollar cost averaging comes handy.
@@FASTgraphs
I have always followed it and it has not only saved me a ton of money, it allows me to recoup my investment faster while buying things that are properly priced. It prevents me from investing in stocks that are ridiculously priced and paying 30/50/100/200 P/E. Put another way, it prevents me from paying $30/$50/$100/$200 for ever $1 of earnings the company has. I couldn't hardly imagine buying a company like AAPL which is long past it's growth phase and paying for a multiple of 30-35 p/e for it, just ridiculous.
SOUL MATE LOL
And during its growing phase you could buy Apple as low as PE 12 if not lower. Stock market is crazy place and dont try to put much logic into short term moves. Many novice investors piled in during 2020 and what a better target for them than Apple . Which they all know and which benefited from helicopter money and stay at home narative.
I think we need to differenciate a company trading for a premium for last 30 decades where there is very high chance it will keep that way for a long time and one time wonders like Apple which suddenly get much more expensiv, than in the past.
Hi Chuck: Love your work. Question: In “What works on Wall Street” O'Shaughnessy's research showed that Price to Book is a better valuation metric, even better is Price to Sales, than P/E (Earnings can be manipulated by the CFO.) Also I would also think that the best P/E metric would differ among industries, 15 might not be the best for all. (Obviously the closer I could get P/B to 1 - I would really have a bargain, amazingly EPD did get fairly close during Covid.) Your thoughts would be welcome. Thanks for all the great work
Thanks for the question. 1 of the things that really inspired me when I 1st cofounded FAST Graphs was the fact that every graph provided a real-world back test. Therefore, you can easily test all the theories suggesting that this metric was better than that metric etc. But let me explain that statement more clearly if I can.
Let’s start with the concept of the 15 P/E. It is a valuation recommendation that Ben Graham made and it does have historical validity and significance that has been validated in real-world circumstances by numerous FAST Graphs. In other words it’s uncanny how often the 15 P/E ratio really does illustrate a valuation reference that stocks track very closely. However, what I think is more significant is the inverse of the P/E ratio which is the earnings yield. A 15 P/E ratio equals a 6.67% earnings yield. Personally, I consider that a minimum earnings yield that I would be willing to accept what you could say pay to invest in any normal company except for the fastest growing ones. For those the forward earnings yield becomes more significant.
Additionally, I also want to point out that a 15 P/E ratio as a valuation reference. Therefore, when that is drawn on a stock graph (FAST Graph) you can use it to evaluate whether it relates to that company or not. In most cases it will come when it doesn’t it becomes clearly evident and that is where the blue line (the normal or market P/E ratio) on the FAST Graphs often becomes more relevant.
Finally, FAST Graphs do provide the ability to evaluate numerous metrics in addition to 3 earnings metrics - adjusted operating earnings, basic earnings and diluted (GAAP) earnings. You can also evaluate a stock utilizing cash flows, EBITDA ( which I often find extremely relevant), EBIT, and yes price to sales. You can also look at the company based on book value under our FUN graphs section, however, I do not find book value very useful except for banks. In conclusion, rather than debate what might be the best metric I simply look at the FAST Graphs(tool to think with), and apply my best judgment based on what each metric shows me. At the end of the day judgment is always required. I hope that helps, Chuck
Excellent. Thanks so much for the clarity on that, Chuck. Very much appreciated. One small follow-up and not to beat a dead horse, but might you tell me why book value is not useful other than with banks? In my small amount of research/backtesting it seems to be just as relevant as the others. In fact, now that we are in the last stages of the expansion in our biz cycle, and a possible recession (unless the Fed keeps the econ. afloat due to the election) I would look for ALL those metrics to hit cyclical lows on my fav stocks, including P/B to offer better buy points than now, unless I am missing something. Thanks again for all your great work.@@FASTgraphs
Use p/e only as a reference and not as the holy grail of investing. We should focus on pre tax earnings, cash flows, return on capital, retained earnings, cash, debt, inventory and equity. Which will give the investor a much better understanding of the company.
A better alternative to p/e is using the forward p/e, again, as a reference to historical norms etc.
Which is why FAST Graphs provides the ability to analyze all of those metrics you referenced, including a set of forecasting calculators. The tool also includes links to the company's website and other research services to aid the subscriber in researching stocks deeper and faster. For clarification, the P/E ratio is not the "holy Grail" instead it is a valuation reference and we articulate that in almost every video. In short it is a tool to think with. One last point that I respectfully disagree with. Forward P/E is speculative and unknown because it must be forecast. In contrast actual reported earnings, cash flows etc. are actual and therefore are much better alternatives. Regards, Chuck
Hey Chuck can we do an update to Disney (DIS) 😊🙏
Chuck if a stock has negative EPS reported, how many quarters should a value investor hold the stock before selling it off?
It depends on why and whether or not a turnaround is evident
Hi Chuck,
what exactly does your "adjusted operating earnings" represent? What is it adjusted for?
It would be really helpful to know, so that I better know what I'm looking at.
All the best!
For starters, adjusted operating earnings are not a FAST Graph metric. That number is supplied by our data provider FACTSET which gathers it from company financial reports. In simple terms operating earnings and exclude non-cash charges, onetime events and other accounting conventions that do not reflect the operation of the business as well as operating earnings do. Here is a link to a more comprehensive definition and description: smartasset.com/financial-advisor/adjusted-earnings
P. S. Operating earnings are non-GAAP. However, we do provide diluted earnings and basic earnings which are.
@@FASTgraphs Thanks for the great and super fast response.
Thanks Chuck, do you think Peter Lynch would have used your charts? He used another service that plotted earnings, and he would look at the growth rate of those earnings, when looking at charts. Is there a way for you to do that with these charts?
We already do that, it is the basic premise of FG. I would like to think Peter Lynch will use our tools if he knew about it
@@FASTgraphs That's what I thought!! Thanks
I'm still struggling with the idea of premium valuation and earnings yield.
I've learned through FASTgraphs that, without P/E multiple expansion, my returns come from
Dividends and
Earnings growth (leading to stock price appreciation).
I'm thinking of a stock's valuation as the amount of capital I have to tie up for $1 in earnings.
These earnings then, in turn, are used to fund business growth, Dividend payments, and stock buybacks.
If 2 companies have the same earnings growth rate and Dividends per share, but one company trades at 30x earnings and the other at 15x, is the only difference that I'm tying up more capital and thus reducing my overall return percentage in the company with the premium valuation?
If you buy and sell at the same PE than your return will be exactly earnings growth plus starting yield. It is a simple math from 4th grade elementary school.
So if you will buy at PE 30 and sell it at PE 30 twenty years from now than your return will be the same as second company bought and sold at PE 15 if growth rae will be the same.
On other hand if you buy it at PE 30 and in the future stock reprice to PE 15 than you will make half the money and other half will be lost in valuation multiple decrease.
This is a mystery I have yet to solve. What does the market apply a premium valuation to one company and not another with similar or almost identical fundamental attributes? I've been trying to figure that out for years
@@Cap_management not the question he asked.
@@FASTgraphs Thanks.
There is something bothering me about earnings yield, I'll let it percolate.
For now, I'm going to estimate my returns as Dividend Yield + Earnings Growth Rate.
It occurs to me that the company has control over the earnings per share and the Dividends per share.
But since they don't control the stock price, they have no control over Dividend Yield or earnings yield.
Maybe that's what's bothering me.
This question is as much about the psychology of investing as it is the math. Math is simple. People are complicated. Short term price swings are more about sentiment than logic in my opinion. If you are reasonably certain the two companies are equal and both have equivalent prospects going forward, the lower P/E stock is the better investment. Good job, you found a mispriced stock. But all things are rarely equal. And you have to have strong convictions. The stock price might get worse before it gets better. Eventually you may be right. Eventually we are all dead. I think people will always struggle with this because you are looking for logic where little exists. It drives me nuts, but every now and then it pays well
Do fastgraph got a APP to install? Going to a laptop to use it is a pain.
warren buffet was buying coke at a 30P/E long ago. good luck getting into to good growth under 20p/e.
You really need a subscription to FAST Graphs
Can you help? I can't get purchase the Fast Graphs using the form.
Can you please send an email to support@fastgraphs.com and let us know what exactly is happening so we can look into this? Polly from suppport@fastgraphs.com
Going by PE is BABA a good buy @ 9 PE?
Sure looks like it to me, if you are willing to be patient
Chuck would you add evaluation of a few ETFs like SCHD. TY
With Munger now gone RIP, you’re one of the last true sages Uncle Chuck.
What software are you using !! Great video thanks … love your videos
WWW.FASTGRAPHS.COM
I like the PE plot with the software...
15 P/E is a good rule of thumb for established companies. But fast growing companies will have P/Es great than 15 and could still be undervalued
As I clearly elaborated on in the video with META and others.
@@FASTgraphs yep, good job
Chuck, you always call yourself co-founder of FastGraphs. Did you buy out the other? Was the other a silent partner? The other co-founder never seems named. Just a curiosity question.
Cofounder Julie Carnevale my wife and partner
@@FASTgraphs A Mom and Pop outfit!
Yes it sounds great, but keep in mind the crazy inflation, so where the smart money should go? There are no logic with FED so P/E ratio around 20-25 is totally normal in inflationary times.
But does that mean it is a sound value to invest. The market often misappraises stocks but does that mean you should participate?
@@FASTgraphs Partially. The main thing is where to park value loosing currency. It’s just a numbers game, right?!
@@AlFakherFan I am not really sure how to respond. The numbers are used to represent values and valuation. As I often state the most important thing is the inverse of the P/E ratio or the earnings yield. I am looking for an earnings yield that compensates me for the risk I am taking. By the way that's regardless of interest rates, the Fed or any other outside force
You, evidently, are not keeping in mind “the crazy inflation” which, based on the data, is abating.
You would have missed the entire 'Magnificent 7' if you followed this rule, among many other quality companies that have *always* traded at a premium or otherwise saw most of their growth at much higher p/e ratios. This may work with some approaches to value investing in some sectors of the economy, but for most it is overly restrictive and likely to lead to diminished returns. Instead, if you want to use a p/e and forward p/e ratio (and PEG) as shorthand you should compare it to (1) the rest of its industry and (2) its historical valuation.
Or perhaps you one have invested in them whenever the margin of safety available and earned significantly more. The comment reminds me of the 50 era when P/E ratios were 40 or more which culminated in many people losing most of their money. Risk should always be respected
Always easy to pontificate while viewing the world through a rear view mirror.
@@puppypuppy1448 so you are suggesting that understanding the operating history or track record of a business is irrelevant? Seem like a strange idea to me.
Fastgraphs in 4k, wow!
Market traded around P/E 10 when he wrote that. Even as low as P/E 4.
Good luck with that today when market is at PE 22. It means you will never own Pepsi, ADP, Visa,, Salesforce etc.
Watch the video again you missed a very important part
Maybe I was not clear with my point. It was very easy for Graham to say never buy above PE 15 when entire market traded at PE 10 and just occasionaly got overpriced. If you apply the same rule in the last 10 years than you will end up with portfolio made basically only of healtcare, banks, tobacco, insurers and some indebted or troubled turnarounds like WBA, MMM etc. If we look at historical P/E chart for S&P 500 than we clearly see that this index traded below PE from 1939 up to 1958 when it get above PE just for few months in 1946.
It was very easy for Graham to say to never buy above PE 15 when market traded two decades below PE 15. Since 1971 when gold was abandoned and ever increasing debt started its exponential growth, the stock market simply changed. PE chart of S&P 500 cleary shows it.
It does not mean that you will not be able to buy good companies under PE 15 or get twice in your lifetime chance to buy below PE in like in GFC or few minutes during the Covid pandemic aka once a century events.
To sum it up if ADP trades at premium P/E 20 for 3 decades than Im willing to pay P/E 18 rather than to wait for P/E 15. As long as I buy under the blue line and not that much above PE 15 Im fine with that to pay a little premium for the company with one of the highest ROIC out of the entire market.@@FASTgraphs
@@Cap_management it's not about easy, it's about sound economic and investment practices. A 15 PE equals an earnings yield of 6.67%. PEs higher than that provide lower earnings yield. For example, a 20 PE equals an earnings yield of only 5%. A PE of 30 equals earnings yield of 3.33%. An earnings yield is the return or yield you would receive if you owned 100% of the company and they paid you 100% of all of their profit. Which of course they would never do. The point being is the earnings yield is a measurement or barometer of risk. The only way an earnings yield below 6.67% makes any sense would be if the company is growing at 15% or higher, few companies meet that threshold. This has nothing to do with historical P/E ratios it's all about investing at a rate of return that makes prudent economic sense. For my money, a 15 PE for most companies, not all, is a maximum I am willing to pay to invest in a stock unless I am supremely confident it will grow very quickly. To summarize, the 15 P/E principal is not relevant to historical valuations because as you said the market can be crazy at times. Instead it is about prudence and risk control. Regards, Chuck
@@Cap_managementYour assertion is incorrect and reflects selective short term memory. Look at MSFT share price 10 years ago, when none of todays geniuses were interested.
Chuch, there is something wrong with your fps. Seems like it is down to 20.
Frame rate is perfectly fine over here. No idea what you’re talking about.
The number of great companies with high PE ratios is high. And companies with lower PE ratios had higher numbers when they were just starting out. Its not a good indicator IMO.
It's called being overvalued, and we are seeing more and more of those great companies with high P/E ratios falling to earth almost every day. If you understand that a high P/E ratio implies a very low earnings yield you would recognize how important that indicator is. Simply stated earnings yield is return you would receive from the company if they paid you 100% of their profits to you and dividends. The rate of return that would imply on high valued stocks should make you realize that when PEs are high those stocks are not good investments over the long run. Regards, Chuck
Costco?
COST is another example like ECL and ADP which I illustrated and covered in the video. However, it is currently more highly valued or better stated more overvalued than it has been in the past. Great company extremely rich valuation
How come there is no way to cancel your FastGraph account. I went to subscriptions and there is NO Cancel button or way of deleting my account. Why?
👑 Bling "silent movie Charlie Chaplin" Chalres and Anorexia Kate needs to sit down with Martin Bashèeet‼️‼️‼️
I cannot hardly hear you.
That's probably my error, I'll try to do better in the future
@FASTgraphs Audio quality could be a little better, but we shouldn't be here for production value. I'm not. I'm here for value investing lol.
@@BS-jg7dy but, what good does it do if you cannot hear it
You can’t hear, but everyone else seems to be OK :)
Hey Chuck if this happens again after you record your video, you can try looking for an audio ‘limiter’ or ‘compressor’ in your video/audio editing program, and increase the volume (gain) even more there. Hopefully that helps!
Chuck is your graphs same as in Gurufocus graphs?
There are minor similarities, but not the same
Ahojky jdes ven and a