P/E Ratio and Stock Price

I seldom use the P/E Ratio to judge a stock price. I know the rule of thumb is a P/E Ratio at 10 or below is a cheap one and a reasonable one is at around 15. However, what is a good P/E Ratio often depends on what sector a stock is in. Also, the “E” side of the ratio can be badly affected by earnings losses and by special events (i.e., when company writes-off goodwill).

I have statistics on the 5 years of median low and 5 year median high P/E Ratios for the stocks I follow. The lowest P/E Ratios sorted by the P/E Low Ratios are shown below and they are all negative. You cannot use negative P/E Ratios in trying to determine a good stock price.

No	Name	Exch	Sym	Exch	Sym	P/E L	P/E H
1	Pulse Seismic.	TSX	PSD	OTC	PLSDF	-22.56	-36.56
2	Ballard Power	TSX	BLDP	NASDAQ	BLDP	-16.67	-42.12
3	HLS Therapeutics	TSX	HLS	OTC	HLTRF	-14.95	-29.30
4	Chemtrade Logistics	TSX	CHE.UN	OTC	CGIFF	-7.50	-13.55
5	Crescent Point	TSX	CPG	NYSE	CPG	-6.95	-12.71
6	TransAlta Corp	TSX	TA	NYSE	TAC	-4.52	-8.99
7	Trican Well Service	TSX	TCW	OTC	TOLWF	-3.23	-6.58
8	Blackberry Ltd.	TSX	BB	NYSE	BB	-2.70	-3.43
9	Trigon Metals Inc.	TSX	TM	OTC	PNTZF	-2.60	-4.00
10	McCoy Global Inc	TSX	MCB	OTC	MCCRF	-2.32	-4.07

The 10 companies with the highest 5 year median low P/E Ratio and 5 year median high P/E Ratios, sorted by the 5 year median high P/E Ratios are shown below. There are a couple of reasons I know of for very high P/E Ratios.

One reason is that if an earnings tank, a stock’s price will only go so low. No matter what the earnings are, especially over a short term, the stock price will only go down so far. The stock price reflects the value investors place on a company. Another reason is that investors feel that a stock has a great future, the P/E Ratio can soar. This is what is probably happening to Absolute Software listed above.

No	Name	Exch	Sym	Exch	Sym	P/E L	P/E H
1	Chartwell Retirement	TSX	CSH.UN	NYSE	CWSRF	230.43	260.37
2	Sienna Senior Living	TSX	SIA	OTC	LWSCF	69.35	90.15
3	LifeWorks Inc	TSX	LWRK	OTC	MSIXF	42.30	54.76
4	Innergex Renewable	TSX	INE	OTC	INGXF	36.32	56.07
5	Parkland Fuel Corp	TSX	PKI	OTC	PKIUF	34.28	46.59
6	FirstService Corp	TSX	FSV	NASDAQ	FSV	32.48	50.41
7	K-Bro Linen Inc	TSX	KBL	OTC	KBRLF	31.30	40.93
8	Waste Connections	TSX	WCN	NYSE	WCN	29.32	37.68
9	Medtronic PCL			NYSE	MDT	26.02	32.17
10	Absolute Software	TSX	ABST	NASDAQ	ABST	25.70	40.72

I look at the 5, 10 and historical median dividend yields compared to the current one to try to evaluate the current stock price. If the 5, 10 and historical median dividend yields are distorted by very high P/E Ratios or negative P/E Ratios, it is difficult if not impossible to evaluate the current stock price using P/E ratios.

The P/E testing on Superior Plus Corp (TSX-SPB, OTC-SUUIF) yesterday illustrates problems when testing using P/E Ratios.

• The 5 year low, median, and high median Price/Earnings per Share Ratios are 4.24, 5.34 and 6.43. the corresponding 10 year ratios are 9.56, 12.07 and 14.58. The corresponding historical ratios are 12.98, 15.73 and 19.53. The current P/E Ratio is 38.98 based on a 15.59 and EPS estimate of $.40. The current ratio is above the 10 year high median ratio. This stock price testing suggests that the stock price is relatively expensive.


• However, all the ratios are negatively affected by earning losses that produce negative P/E Ratios. They are also affected by high P/E Ratios because of some years of very low earnings. Earnings for this stock are quite volatile also. The P/E Ratio for 2022 is better with a P/E Ratio of 18.56 based on a stock price of $15.59 and EPS estimate for 2022 of $0.84. This testing also says that the stock price is relatively expensive because the P/E is higher than the 10 year high median ratio.


• The P/E Ratio for 2023 is 12.37. This is based on a stock price of $15.59 and EPS estimate for 2023 of $1.26. This testing says that the stock price is relatively reasonable but above the median because the P/E Ratio is between the median and high 10 year median ratios. However, the further out an estimate is from today’s date, the less trustworthy it is. This is not a good test for assessing the current stock price.

My favorite stock price test is using the historical and the 10 year median dividend yield compared to the current dividend yield. The price is good if the current dividend yield is higher than the historical and 10 year median dividend yields. I liked this stock price evaluation to be confirmed by comparing the current P/S Ratio to the 10 year median P/S Ratio. For the P/S Ratio:

• If the current ratio is 20% or more below the 10 year median ratio, then the stock price is cheap.


• If the current ratio is below the 10 year median ratio, but not as high as 20% below, then the stock price is relatively reasonable and below the median.


• If the current ratio is above the 10 year median ratio, but less than 20% above, then the stock price is relatively reasonable but above the median.


• If the current ratio is 20% or more above 10 year median ratio, then the stock price is expensive.

On my other blog I wrote yesterday about Superior Plus Corp (TSX-SPB, OTC-SUUIF) ... learn more. Next, I will write about Badger Infrastructure Solutions Ltd (TSX-BDGI, OTC-BADFF) ... learn more on Friday, August 13, 2021 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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