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

In this case the first stock is yahoo incorporation. The current share price is 36.50 and the earning per share accounts for -4.76, the current intrinsic value of Yahoo incorporation is $22.59. The rival company of yahoo is GOOG or Alphabet incorporation is having current share price of $709.74, the intrinsic value accounts for $393.17. Since, the intrinsic value is less than the market price of both the stock, therefore both the stock are overpriced. In this case the preferred stock is GOOG and the peer stock is Yahoo incorporation.

In this case the second stock is EBAY. The current share price is 23.65 and the earning per share accounts for 1.31, the current intrinsic value of EBAY is $28.14. The rival company of EBAY is Amazon having current share price of $702.80, the intrinsic value accounts for $567.68 and earnings per share accounts for 2.43. Since, the intrinsic value of EBAY is more than the market price, therefore the stock are underpriced. On the other hand Since, the intrinsic value of Amazon is less than the market price, therefore the stock is overpriced In this case the preferred stock is EBAY and the peer stock is Amazon incorporation because relative to the stock price the EPS of EBAY is quite high in comparison to that of Amazon.

In this case the third stock is Wal-Mart. The current share price is 69.86 and the earning per share accounts for 4.57, the current intrinsic value of Wal-Mart is $61.74. The rival company of Wal-Mart is TGT having current share price of $68.66, the intrinsic value accounts for $65.36 and earnings per share accounts for 5.32. Since, the intrinsic value is less than the market price of both the stock, therefore both the stock are overpriced. In this case the preferred stock is TGT and the peer stock is Wal-Mart.

In this case the fourth stock is Apple. The current share price is 95.22 and the earning per share accounts for 8.98, the current intrinsic value of Apple is $142.81. The rival company of Apple is HPQ having current share price of $11.66, the intrinsic value accounts for $32.76 and earnings per share accounts for 2.08. Since, the intrinsic value is more than the market price of both the stock, therefore both the stock are underpriced. In this case the preferred stock is HPQ and the peer stock is Apple incorporation as the EPS of Apple is almost 4 times than that of HPQ but the stock price of HPQQ is almost 9 times less than that of Apple.

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