You Cannot Recognize Abnormal Until You Know What Normal Looks Like
Doctors wouldn’t think about deciding on treatment plans without seeing this key data.
Learn more about How to Research Mutual Funds.
How Do You Find What a Stock’s “Normal” Looks Like?
I prefer using the Value Line Investment Survey pages, when available. Their sheets offer up to 15 years of per share data, all on one page. It is the only place that combines that volume of information along with the stock price action from the same points in time.
EMR was usually a good buy when its P/E was lower than normal, and its yield was higher than its own 17.4 average P/E and about a 2.86% dividend. Early in 2011 the P/E was excessive and the dividend was scrawny. The shares dropped by almost 39% in just 10 months.
Buyers at that fall had a chance at a 79% gain over the next couple of years. The exact same shares were first expensive, and then cheap, just months apart. Making money was a function of smart shopping rather than just deciding you wanted to own EMR.
Late in 2013, EMR again got up to $70.66 and 20x trailing EPS. The yield was subpar. As of Oct. 9, 2014, it had regressed back to $60.07 despite posting record numbers this year.
A bit of simple math showed that 23.7x was a normalized reading for Wild Wings. 2007’s crazy high 43.5 P/E was unsustainable even though BWLD continued to unleash terrific numbers.
Value seekers were able to get in more than three years later, and $14.50 cheaper when the overall investment climate cooled off and the P/E registered way below 98.6 degrees.
Be sure to see our Beginner’s Guide to Domestic Stock Funds.
The September 26, 2014 reading was the most extreme valuation since the peak in 2008, which preceded a 5.5 year share price stagnation. That doesn’t bode well for the near term, barring a takeover.
Ditto for venerable Coca-Cola (KO). Vital signs point to overpriced territory compared with its typical P/E and yield. Those who paid too much back in 2008 had to wait 2.5 years getting even.
The Bottom Line
Then lather, rinse, and repeat.