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Investing in low P/E Stocks

Your stock broker suggests you concentrate your portfolio on stocks with low P/E ratios. She explains that these firms are likely to be out of favor with investors, because they have a low price relative to their current earnings. Is this necessarily a good investment practice? Why or why not?

Solution Preview

P/E ratios are a useful indicator and tool when performing valuation and comparing firms.

Price Earning ratios = Market price of equity per share/Earnings per share.

The relationship between the market price of a share of stock and the stock's current earnings per share is often stated in terms of a price-earnings ratio. The price-earnings ratio is widely used by investors as a general ...

Solution Summary

The solution examines whether stock brokers should invest in low P/E stocks. P/E stock ratios are determined.