Relative P/E

Relative P/E

Anyone getting into investing will have surely come across the term P/E – in fact, you’ve probably read the term on our platform several times. Besides being a useful ratio and popular tool for measuring a company’s value, an investing strategy also uses it. The ratio itself is calculated by dividing the current stock price by the earnings per share in the most recent 12 months.

Summary

Using the relative P/E ratio, it’s possible to put a stock’s price in better relation to the overall market or the company’s specific industry. This is useful for finding companies that have been ignored and are thus under-priced, or for finding companies that are expected to make a change that will affect their earnings. Companies with lower risk or better prospects than the market, or in some cases both, will have a higher P/E ratio. Look out for companies with a relative P/E ratio above 1.0, they are often worth further study.

Success Formula Relative P/E

  1. MktCapM is >= US$ 300 million (basis year 2000) adjusted yearly
  2. Number of analysts providing EPS estimates for the current FY is >= 3
  3. Consensus change % of current FY Est. EPS from 1 month ago to today is > 0
  4. Consensus change % of next FY Est. EPS from 1 months ago to today is > 0
  5. Number of EPS upward revision in current FY over last month is > 0
  6. Number of EPS downward revision for current FY over the last month is = 0
  7. Number of EPS upward revision for next FY over the last month is > 0
  8. Number of EPS downward revision for next FY over the last month is = 0
  9. Current FY P/E ratio is < screening universe average
  10. P/E ratio for each of the 5 FY is < screening universe average
  11. Take the top 100 stocks with the highest current P/E ratio

Hypothetical performance back-tested

Data source: Bloomberg, Calculations: meetinvest

Disclaimer

Hypothetical performance is not necessarily indicative of future results. No representation is being made that any action will achieve profits or losses similar to those displayed. The result may be overstated as neither transaction costs nor bid/ask spreads nor slippage have been considered. Output equally weighted with maximum 5% allocation per position and rebalanced monthly. Holdings are systematically replaced when the screening criteria are not met anymore. No additional buying or selling rules (technical analysis) have been employed.

For the backtest, the top 50 stocks with the highest current P/E ratio were taken.

Historical monthly relative performance

How to read this graph:
A green bar shows how much the guru strategy outperformed the benchmark index in a particular month. A red bar shows how much the guru strategy underperformed the benchmark index in a particular month.

Data source: Bloomberg, Calculations: meetinvest

Disclaimer

Hypothetical performance is not necessarily indicative of future results. No representation is being made that any action will achieve profits or losses similar to those displayed. The result may be overstated as neither transaction costs nor bid/ask spreads nor slippage have been considered. Output equally weighted with maximum 5% allocation per position and rebalanced monthly. Holdings are systematically replaced when the screening criteria are not met anymore. No additional buying or selling rules (technical analysis) have been employed.

For the backtest, the top 50 stocks with the highest current P/E ratio were taken.

Historical portfolio turnover

Data source: Bloomberg, Calculations: meetinvest

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