Can P-E ratios be an investors divining rod?
The ratio — literally a firm’s share price divided by its earnings — is easy to calculate and apply, at least in the most basic sense. A high P/E ratio suggests a company may be overpriced. A low P/E suggests a bargain. The ratio can be merciless. During the tech boom, P/E ratios for many Silicon Valley companies grew so outlandish that investors chose to ignore them. Even after this summer’s market sell-off, many of the Bay Area’s biggest firms carry P/E ratios that analysts consider too high. Those stocks, in other words, may not be as cheap as they seem. “I have no inclination to say right now that stocks are cheap,” said Douglas Lee, a senior analyst covering the semiconductor industry for Banc of America Securities in San Francisco. P/E ratios for his field are still a bit high, Lee said, although they are far more sustainable now than they were months ago. “I think they’re more fairly valued,” Lee said. “The only problem is, if it’s fairly valued, that doesn’t leave a lot of up
