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Step two used the price-earnings ratio as an independent variable to predict risk.
This article examines the historical relationship between price-earnings ratios and subsequent stock market performance and discusses why history might not repeat itself this time.
If the retention is high (relative to equity) and the company experiences a large loss, it could encounter an increase in the investors' required return and a substantial decrease in the price-earnings ratio.
While one could simply dismiss this observation as irrelevant to outside investors, the historical record suggests that top executives may be on to something: over longer time periods, stocks with low price-earnings ratios and low market-to-book ratios have outperformed the more glamorous issues characterized by high valuation ratios.
By themselves, price-earnings ratios are not only meaningless as predictors of market value or the fairness of market prices, they can lead investors into misperceptions of which alternatives provide the most attractive returns for their available funds.
As a result, conventional price-earnings ratios hit a peak of more than 70 in August 1987, which was about three to five times the PE ratios in other major markets.
Investors should mix their holdings to include about 30 percent technology stock, some value stocks that have low price-earnings ratios and solid industry leaders, Christopher said.
Based on some preliminary findings, such firms have lower price-earnings ratios and smaller appreciations in market value over time than profit-oriented firms.
For example, the Japanese stock market places very high price-earnings ratios on Japanese equities, and some have argued that the resulting lower cost of equity capital gives Japanese firms a competitive edge over U.
While entertainment software companies consistently show revenue and earnings growth and boast price-earnings ratios stronger than most technology companies, their stock prices remain comparatively low, Halpern said.
In addition to acknowledging Schwab for giving investors a full range of investment services as well as a variety of ways to access them, Barron's reviewer, Theresa Carey, gave the company credit for upgrades made to its research and planning tools, noting that Schwab "allows you to generate reports by typing commands in plain English," and to further "customize reports by asking for specific information such as analyst ratings or price-earnings ratios.