“Perhaps the most succinct commentary on Leonid Kanopka’s naive claim that Apple (AAPL) is a ‘bubble ready to burst’ (see “A few fries short of a Happy Meal”) was Nicu Mihalache’s plaintive response: ‘Do you know what P/E is?'” Philip Elmer-DeWitt reports for Fortune.
“The price-to-earnings ratio, as every trader knows, is the simplest way to gauge how the market values a company. A high P/E — like the nearly 50 times earnings investors were paying for Apple four years ago — is a signal that the market has high hopes for a company,” P.E.D. explains. “A low P/E — like the current 10.05 forward earnings ratio — is a vote of no confidence.”
P.E.D. reports, “There are more sophisticated ways to value a company. Asymco’s Horace Dediu, who produced the chart above, favors P/E/tG (price to earnings to trailing growth). But his P/E chart, which shows Apple trading in a band between 35 and 45 times earnings between 2006 and most of 2008 and between 15 and 25 times earnings since 2008, tells you most of you need to know. In a piece posted Thursday entitled The Thermodynamics of Apple’s Share Price Dediu writes: ‘Note that the price has dropped outside the current band for the first time since the great recession. It is still below 15xE today. Perhaps a new band is forming.'”
P.E.D. asks “What’s going on?” in the full article here.