As we already saw in this blog, the Another reason is the most used and one of the most important in the relativa valoración. In principle, stocks with a low PER are often considered "cheap", while stocks with a high PER are often considered "expensive. However, this is not always the case. In this article we will look at the 10 reasons why low PER stocks can be expensive, as well as the 10 reasons why high PER stocks can be cheap.
10 reasons why low PER stocks can be expensive
Shares of a company that trade at a low PER do not necessarily have to be cheap. Here are the 10 reasons why low PER stocks can be expensive:
- The future income of the company is highly uncertain.
- The company operates in a highly cyclical sector.
- The company competes in a very volatile sector.
- The company competes in a sector with a lot of competition and a lot of price-demand elasticity.
- The company competes in an unprofitable sector.
- The company competes in a mature sector, with low growth prospects.
- The company was growing, but it is no longer.
- The company is poorly managed.
- The company has little cash generation.
- The company has a weak balance sheet.
Examples of companies of this type could be real estate and banking stocks at the peak of the housing and credit bubble. So could a company like Research in Motion (the manufacturer of Blackberry mobiles), which was listed in a very volatile sector in which in a short time you can go from success to bankruptcy.
10 reasons why high PER stocks can be cheap
Just as low PER stocks don't have to be cheap, high PER stocks don't always have to be expensive. Here are the reasons why high PER stocks can be cheap:
- The company has excellent growth prospects.
- There is great confidence in the company's forecasts.
- The company has a predictable profitability.
- The company has a solid market share.
- The company operates in a sector with high barriers to entry.
- The company has sustainable competitive advantages.
- The company has a highly inelastic demand.
- The company has high margins and excellent profitability.
- The company has a great management team at the helm.
- The company has a great cash generation.
- The company has a very strong balance sheet.
An example of a company that I considered cheap and bought its shares despite trading at a high PER was Google at the end of the year 2.008. Shares of Google were trading at PER 25 to $ 300 per share. They are currently trading at more than $ 1.000 per share, so despite trading at a high PER, Google shares were cheap.
Of course, you should not forget that this was an exception and that the general rule is that the lower PER is always better.