Price/Earnings ratios recover from last year’s correction
There are only two ways to make money in the stock market—slow and fast. The slow money comes from an increase in earning power over time. The fast money comes when investors change their minds about the future of that earning power.
The optimism or pessimism about future earnings shows up in the PE ratio, or how many dollars investors will pay for each dollar of earnings. Since the end of 2011 there has been a dramatic increase in that ratio.
We have 8 stocks in our portfolios that are up more than 15% so far this year. All but one (Apple) have seen their PE ratios increase—some by a lot. We think these increases are justified, and in most cases today’s higher PE’s are still below where they were one year ago.
While these are the periods all stock investors dream about, we know that the fast money phase doesn’t last very long. If we take the first six weeks of the year and multiply by 8 to get an annualized gain, the numbers get silly. So we know things will slow down—at least.
The threat of some kind of financial accident in Europe remains, but in the last two month the odds of such an event have decreased enormously. In its place we have governments and central banks pouring on fuel for an asset boom of some significance.
We need to take advantage of this current environment so that when the inevitable crisis returns we have more assets to help cushion the blow.
Daniel A. Ogden
Disclosure: Dock Street Asset Management, Inc. and our clients may own securities. This article is not intended to be used as investment advice.