Investors often use the price earnings, or P/E ratio, as a way to gauge the rela

Question

Investors often use the price earnings, or P/E ratio, as a way to gauge the relative value of a stock in relation to its peers. It is the market price of a share of stock relative to its earnings per share. “The more positive investors feel about a stock’s future prospects, or the less risk they feel the stock has, the higher the stock’s P/E ratio” (Keown, 2013, p. 439).

Other investors view a low P/E as a ‘value,’ meaning the price paid for the stock is less relative to the earnings generated by the firm itself.

Select four stocks of your choice that are diversified across four different sectors or industries. Research each stock by keying its ticker symbol or name at the landing page of finance.yahoo.com. Find the P/E ratio. Then click on the “Competitors,” and select a competitor firm, and view its P/E. Present this information in your post and label your selected stock as “choice” and the competitor stock as “peer.”

Comment on your findings. Based on P/E, do you believe your choice stock to be fairly priced, a ‘value,’ or overpriced as compared to a peer?

Explanation / Answer

I have chosen 4 different companies and its competitors as required. Please find below table

Last column is industry average P/E, which is a good component for comparison purposes.

1. Fedex - Since its P/E is much more than its competitor UPS and also more than industry average, we can classify this stock as overpriced

2. Oracle - Since its P/E is much less than its competitor Microsoft and also less than industry average, we can classify this stock as under priced or rather a value stock

3. Home Depot - Since its P/E is in line with its competitor Lowe's and also in line with industry average, we can classify this stock as fairly priced

4. Apple - Since its P/E is much less than its competitor Google and also less than industry average, we can classify this stock as value stock

Sl. No. Choice P/E Peer P/E Industry P/E 1 Fedex 42.22 UPS 23.90 21.43 2 Oracle 18.92 Microsoft 36.16 38.67 3 Home Depot 24.52 Lowe's 24.98 24.46 4 Apple 13.11 Google 30.82 21.67

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