Forum Archive Index - July 2000

["Wedde, John" <john.wedde@cit.ac.nz>]

Hi Brian,
I hold shares in both categories [high p/e and low p/e]. Those with a low
p/e I usually don't give more than a glance when surfing through my
portfolio. They don't make me too nervous. A low p/e means the cost of my
shares will be earnt back very quickly. There does not appear,
notwithstanding extraordinary events, to be too much downside. On the other
hand high p/e's mean maximum hype and maximum expectations. I've learnt the
hard way in life that too many of these are dangerous!!. There is a lot of
downside when expectations are not lived up to. On the other hand these
expectations can drive a share price to giddy heights very quickly. When
this happens it's good to be aboard for the ride, just make sure you get off
the train before it crashes!! Shares with high p/e's in my portfolio I watch
like a hawk every day. They make me nervous.
I guess us fundamentalists are all looking for low p/e's [and low
price/nta's as well - this is a favourite ratio of mine] combined with
realistic expectations for rapid earnings growth --- kind of having your
cake and eating it too!
Cheers,
John 

-----Original Message-----
From: Brian Gale [mailto:brigale@i4free.co.nz]
Sent: Friday, 28 July 2000 12:07
To: sharechat@sharechat.co.nz
Subject: [sharechat] The P/E Ratio


        How useful is the P/E ratio as a yardstick to the price worthiness
of different shares

In many cases it is a reasonable yardstick but in some it seems useless
because of abstract factors.

For example, looking at the NZSE Top 40.  The mean P/E is approx 16
The lowest P/E belongs to AIRNZ (A) at 3.9
The 2nd highest is BCH at 50.8  (highest is INL at 55.4)

Why the great difference between these two Companies ?  Why is AIRNZ 12
below the mean and BCH 35 above.  Using the P/E yardstick AIRNZ is greatly
underpriced and BCH is greatly overpriced.
AIRNZ should be the best share to buy and BCH & INL the worst. In other
words the low P/E Coy should have the potential to rise and the high P/E Coy
the potential to fall.

To be logical, prices should be related to expectations of improved
earnings. How can this be related to AIRNZ and BCH ?  Is the future
potential of AIRNZ so bad that their future earnings will fall to 25% of
their current earnings and is the future potential of BCH so good that their
earnings will be 200% above their current level.  One would hardly think so.

So what are the factors that make these highly different P/E ratios ? It
would seem that a major factor must be popularity. But the risk factor for
BCH is surely very high and the converse for AIRNZ..

Look forward to your comments

BG  (Discl.  Hold neither but have had AIRNZ a couple of times to my regret)




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