Karen Firestone: Cheap stocks are appealing – but not always the best deal. Here’s why

The investment world loves goalposts to measure, compare, and even hold sacred. One of the most holy is the price-to-earnings ratio , defined as a stock price divided by its net income per share. The higher the PE ratio, the more investors believe the business will generate strong earnings growth in the future to justify the price today. For example, if a company's stock price is $30 with earnings per share of $1.00, it has a current price-to-earnings multiple of 30.

At that point, their earnings may be about to decline, which often coincides with stock underperformance. However, my thesis was purely conjecture. It was time to dig into the data and test my assumptions. 'Cheap' names don't always see outperformance We reviewed statistics on the 100 largest stocks in the S & P 500 for five consecutive years, using their PE on current-year earnings, excluding stocks whose PE was unavailable because of losses.

Source: News Formal (newsformal.com)

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