Significant P/E and P/B Movements
Yesterday the market experienced a significant median P/E drop from 15.3 to 14.4 due to stable earnings combined with price dips.
This is the lowest median P/E level since early February, and one of the lowest levels in months. Interestingly, median P/B significantly increased from 2.01 to 2.16. This observation suggests that asset levels are decreasing while earnings are increasing, both compared to price.
I have a preference for investing on P/B rather than P/E. Earnings are much more volatile than assets, and can inaccurately distort a company's worth for a quarter. For example, the biotechnology company Anacor (ANAC) maintained a 0 P/E for months because it had no positive net income.
After last quarter's earnings announcements it boasted a nice P/E of 9. Now this influx of "earnings" was not from its operations, but from a one-time lawsuit settlement of $150M+, which without it, would have had another quarter of negative net income.
Speculators began to get greedy and spiked the price up near an all-time high. Now, as insightful investors we know that the market always overcorrects itself. That came true for ANAC, as it lost about 30% of its value in the past week, along with many other overpriced biotechs.
The lesson here is that if you're going to put your hard earned money in a stock, make sure you are receiving something back in return (cash, inventory, land, equipment). Simply receiving a possibility of increased earnings is not enough. Companies are never guaranteed to earn its projections, however tangible assets are a guaranteed return on your investment, and something that will almost always be in demand (unlike speculative earnings).
Happy Trading to all