Stock Market Signs You Need To Know Now
The stock market has been in a bull market which means it has been rising or almost six years now. This means that a lot of companies have increased in value. It’s ok for good companies to be over priced. That means they are doing something right by attracting more investors and are poised for growth. It’s when the companies that don’t have great opportunities ahead that should cause alarm.
Learn about why overvaluation doesn’t always mean bad news for the stock market.
But recently, Paulsen’s data shows, lower-quality firms–those, for example, with heavy
loads, a lot of competition and poor outlooks—have been awarded P/Es that are almost as high as the P/Es of cream-of-the-crop companies. “A lot of our guys complain that values are so tightly bunched that it’s hard to be a stock picker,” Paulsen says of Wells’s money managers.
As an investor there are three main things to take away from this article. The first being you have to look a company’s P/E ratio against it’s peers. If you find a great company that could grow but has a high P/E compared to one of it’s competitors which also has an overvalued P/E ratio in the industry. It is probably best to invest in the strong performing stock than go for the value deal. The second thing is to look at stock prices compared to cash flow (essentially earnings plus depreciation and other noncash charges) and compare these ratios among the others in the industry. The third is to compare share price with a company’s book value (assets minus liabilities). These are three metrics you can use to compare a stock you might want to invest in versus industry peers to evaluate if your stock is an attractive investment.
Read about what these three ratios mean for the stock market in 2015.
About Shaun Archer Tatum Shaun works in corporate finance in New York City. He has done financial consulting for several start-ups and has worked at several Fortune 500 companies. He has contributed several finance/investing articles on Seeking Alpha which have been published on Yahoo! Finance.