Discover more from Theory A : Visualize Value Investing
New Feature: P/E Dislocation
One of the biggest benefits of using a P/E multiplier on fundamentals is that we can easily compare the market cap (or stock price) to the fundamentals.
If the market cap exceeds the fundamentals (the red arrow below), then it’s P/E expansion. It can be justified if the company has a new business model that gives them greater growth of profit margins, but often times it’s an indicator that the stock is overvalued.
Similarly, if the market cap line falls below the fundamentals, then it could potentially be undervalued.
Previous with our platform users would have to manually look at each chart and see if the location is higher or below what the fundamentals suggest. (Whether or not it’s the green or red arrow situation)
However we’ve now added a “P/E Dislocation Ratio” that shows the ratio of the trailing twelves months P/E ratio to the historical average P/E ratio.
If this ratio is above 1, then it means that the recent P/E ratios are greater than the historical baseline and could potentially be overvalued. If it is less than 1, then it could potentially be undervalued*
This will allow users to easily filter for stocks that have P/E dislocations that are above or below their historical average.
Give it a try here! (Free for a limited time while we collect feedback but this will eventually be a premium feature)
In the coming week’s we will be creating a filter that integrates P/E Dislocation Ratio and analyzing the companies the filter recommends.
* Often times, there is a reason for why it’s overvalued or undervalued but often times that reason is emotionally driven and based on short-term energy. E.g. the price for dogecoin or some meme stock can increase 50x because there is a sudden demand for it by individuals who NEED to have it now. The price is accurate because that’s the price needed to satisfy the demand at the time. But by comparing the P/E ratio to the fundamentals you can gain some intuition on whether or not the P/E expansion is justified or not.