Stock valuations matter. Just ask investors in Meta Platforms META, +6.01%. Facebook parent’s stock is lower today than where it traded in January 2017.
To make his point, Brightman bet that Facebook stock would be beaten by oil company Chevron CVX, +1.04%. This was a gutsy prediction since, unlike Meta, Chevron was out of favor at that time. In contrast to Facebook’s trailing P/E ratio of 92, Chevron’s P/E was just 9. Instead, the reason Brightman won his bet was that Meta investors had sky-high expectations for the company’s earnings and Chevron investors had low ones. It wouldn’t have taken much of a hiccup to cause Facebook to come up short, or much good news for Chevron’s stock to surprise to the upside.
The chart shows that the lowest P/E stocks hugely outperformed the stocks with the highest ratios. It isn’t even close: The lowest P/E portfolio beat the highest P/E portfolio by 6.1 annualized percentage points. To be sure, French’s calculations do adjust for transaction costs. But unless the low P/E portfolio undergoes significantly more transactions than the high P/E portfolio, which I doubt, transaction costs shouldn’t have a marked impact on the difference in their returns.
Source: News Formal (newsformal.com)
This is nonsense. Low P/E can also mean it is destroying shareholder value and the current earnings are too high.