Thursday, March 31, 2016

Buy at Median Ratio

It is always nice to buy a stock you want at a cheap price, but this is often not possible. What is possible is to buy at a reasonable price. To me a reasonable price is when the ratio I am looking at is at least below the high median value. However, a better price is when a ratio is at or below the median ratio.

For Richelieu Hardware Ltd I wrote "I have 5 year low, median and high median Price/Earnings per Share Ratios of 15.46, 18.11 and 20.76. These are higher than the corresponding 10 year P/E Ratios of 14.03, 15.47 and 16.94. The historical median P/E Ratios is even lower at 14.49. The current P/E Ratio is 21.29. This is based on a stock price of $22.99 and 2016 EPS estimate of $1.08. This stock price testing suggests that the stock price is relatively high."

If the current P/E was at or below 14.49, then the stock is definitely cheap. It is possibly cheap below 15.46, which is really not that much higher. If a stock is cheap, is it cheap for a reason or is it because the whole market or the sector of this company also relatively low? This is always worth investigating when a stock is cheap.

If stock is cheap because of the latter reasons, then it is a buy. If it is cheap for a reason, you have to explore more carefully why it is cheap and how current problems will affect the long term viability of the company. If the company is having problem because of recession, you can look at how it has handled recession previously. Good debt ratios especially a good Liquidity Ratio can really help here.

If the current P/E Ratios are at or below 15.47 and possibly at or below 18.11 then the price is probably reasonable and below the median. This could be a good entry point. If the P/E Ratio is above 20.76 it is definitely expensive.

The P/E Ratios could be rising on this stock because it is getting bigger (higher market cap) or because the general stock market's P/E Ratio is rising. For this stock, it probably is a bit of both.

None of this is an exact science, of course. Investing is more art than science. Investing is like Life. It is messy and there are no clear cut answers.

On my other blog I wrote yesterday about AltaGas Ltd (TSX-ALA, OTC-ATGFF)... learn more. Tomorrow, I will write about BCE Inc. (TSX-BCE, NYSE-BCE)... learn more on Friday, April 1 around 5 pm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

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