Peeling back the markets PE

Peeling back the markets PE - Upside: Peeling Back the...

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See a sample reprint in PDF format. Order a reprint of this article now Bloomberg News Eli Lilly's beaten-down share price might signal an opportunity. U.S. stocks are 37% cheaper than usual, based on one comparison of share prices to company earnings. By another measure, they are 25% overpriced. Here's how to cut through some of the contradictory readings of that cornerstone of value investing—the price/earnings ratio—and decide whether now is the time to load up on stocks or to sell. A P/E ratio is a company's stock price divided by a year's worth of its per-share earnings. It's one measure of how much investors are paying for the value a company creates—and it's useful for sizing up the broad market at a glance. trailing earnings, based on its Friday close of 1216 and underlying earnings of $83.87 over the past four calendar That valuation is spot-on with the historical average: U.S. stocks traded at an average of 14.5 times earnings between 1872 and 2000, according to a study by the Federal Reserve Bank of Kansas City. Based on this measure, investors should buy as needed, but not get greedy. One twist on P/E math is to use "operating" earnings, rather than earnings as defined by regulators. "There's no compiles the measure. "It's more principle. I want to know how much I made from widgets last quarter, not how
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This note was uploaded on 11/03/2011 for the course ACCT 101 taught by Professor As during the Winter '11 term at Wisc Oshkosh.

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Peeling back the markets PE - Upside: Peeling Back the...

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