Your browser does not support JavaScript!
AAII: The American Association of Individual Investors

P/E Relative Screen <

A screen that looks at the relationship of a stock's price-earnings ratio to that of the industry and market. 

Guru
None
Factors
Value, Earnings Estimates

Strategy Performance

  Since
Inception
YTD
Return
5-Year
Return
10-Year
Return
 
Performance 13.1% -15.7% 3.7% 9.2% Avg # of Monthly Holdings 39
+/- S&P 500 +7.8 -11.4 -4.7 -2.4 Turnover % 64.0%

Performance data as of 6/30/2020.

Passing Companies

Stocks That Currently Pass The P/E Relative Screening Model

Subscribe to Stock Investor Pro to Access All Screens Updated Daily!

Passing companies as of 6/30/2020. Companies are ranked by PE Relative Valuation as % of Price
Company Name Ticker Exchange Price Price as % of 52 Week High EPS-Diluted Continuing 12m EPS Est Y0 EPS Growth Est PE PE Relative Avg-5 year PE Relative Adjusted P/E PE Relative Valuation PE Relative Valuation % Price
3M Co MMM N $ 155.99 83.0 8.52 8.12 1.4 18.3 1.16 19.65 167.47 93.15
American Woodmark Corporation AMWD M $ 75.65 64.0 4.42 3.92 0.0 17.1 1.02 17.32 76.54 98.83
Ameriprise Financial, Inc. AMP N $ 150.04 83.0 27.01 16.60 11.6 5.6 0.60 10.28 277.53 54.06
Amkor Technology, Inc. AMKR M $ 12.31 81.0 0.86 0.62 17.3 14.3 0.90 15.35 13.24 92.99
Anthem Inc ANTM N $ 262.98 84.0 18.48 22.25 14.3 14.2 0.86 14.54 268.65 97.89
Artisan Partners Asset Management Inc APAM N $ 32.50 85.0 2.68 2.50 -3.3 12.1 0.81 13.72 36.78 88.36
Bank of New York Mellon Corp BK N $ 38.65 75.0 4.64 3.67 -0.2 8.3 0.71 12.12 56.29 68.66
Bank of Nova Scotia BNS N $ 41.24 71.0 4.46 3.66 -3.1 9.3 0.61 10.37 46.23 89.21
Bank Ozk OZK M $ 23.47 74.0 3.30 1.52 0.0 7.1 0.89 15.20 50.18 46.78
BankUnited BKU N $ 20.25 54.0 2.16 0.89 0.0 9.4 0.63 10.68 23.05 87.85
Big Lots, Inc. BIG N $ 42.00 94.0 7.06 6.41 -0.6 6.0 0.59 10.09 71.16 59.03
Boise Cascade Co BCC N $ 37.61 91.0 2.08 1.48 0.0 18.1 1.67 28.32 58.91 63.85
BrightSphere Investment Group Inc BSIG N $ 12.46 96.0 2.32 1.45 5.2 5.4 0.57 9.77 22.63 55.06
Canadian Solar Inc. CSIQ M $ 19.27 76.0 2.85 2.91 0.0 6.8 0.46 7.85 22.41 86.00
Carlisle Companies, Inc. CSL N $ 119.67 70.0 8.00 5.66 0.0 15.0 1.10 18.70 149.61 79.99
Celanese Corporation CE N $ 86.34 67.0 6.08 6.81 4.6 14.2 0.87 14.84 90.16 95.77
Central Pacific Financial Corp. CPF N $ 16.03 52.0 1.77 1.18 0.0 9.0 0.83 14.11 25.04 64.02
Central Valley Community Bancorp CVCY M $ 15.39 69.0 1.73 1.49 0.0 8.9 0.65 11.06 19.07 80.69
Comfort Systems USA, Inc. FIX N $ 40.75 76.0 3.03 2.39 0.0 13.5 1.03 17.47 52.88 77.06
Commercial Metals Company CMC N $ 20.40 85.0 2.47 2.37 -5.2 8.3 1.41 23.97 59.08 34.53
Denny's Corp DENN M $ 10.10 42.0 1.82 0.14 0.0 5.6 1.33 22.65 41.17 24.53
Diodes Incorporated DIOD M $ 50.70 85.0 2.72 2.16 0.0 18.6 1.86 31.66 86.22 58.80
Dunkin Brands Group Inc DNKN M $ 65.23 77.0 2.89 2.57 2.8 22.6 1.46 24.78 71.63 91.06
E*TRADE Financial Corp ETFC M $ 49.73 87.0 3.46 2.77 -8.5 14.4 0.88 14.99 51.89 95.83
East West Bancorp, Inc. EWBC M $ 36.24 70.0 4.49 3.63 0.0 8.1 0.68 11.55 51.81 69.95
Eaton Vance Corp EV N $ 38.60 75.0 3.41 3.14 1.7 11.3 0.85 14.52 49.52 77.95
Electronic Arts Inc. EA M $ 132.05 99.0 10.25 5.05 12.3 12.9 1.10 18.71 191.74 68.87
Emcor Group Inc EME N $ 66.14 71.0 5.82 4.47 0.0 11.4 0.89 15.21 88.42 74.80
Emerson Electric Co. EMR N $ 62.03 79.0 3.68 3.02 1.5 16.9 1.03 17.54 64.48 96.20
Enterprise Financial Services Corp EFSC M $ 31.12 64.0 3.34 3.06 0.0 9.3 0.70 11.98 40.00 77.81
Euronet Worldwide, Inc. EEFT M $ 95.82 56.0 5.19 1.63 0.0 18.5 1.30 22.13 114.76 83.49
Exxon Mobil Corporation XOM N $ 44.72 57.0 2.49 -0.30 9.3 17.9 1.39 23.63 58.87 75.97
F.N.B. Corp FNB N $ 7.50 58.0 1.02 0.85 0.0 7.4 0.75 12.66 12.88 58.21
Federated Hermes Inc FHI N $ 23.70 62.0 2.79 2.41 -7.4 8.5 0.70 11.88 33.10 71.60
Fidelity National Financial Inc FNF N $ 30.66 62.0 2.87 2.67 0.0 10.7 0.86 14.66 42.03 72.95
First Business Financial Services Inc FBIZ M $ 16.45 60.0 2.39 1.75 0.0 6.9 0.66 11.18 26.75 61.50
First Community Corp (South Carolina) FCCO M $ 15.15 69.0 1.36 1.04 0.0 11.1 0.84 14.20 19.36 78.24
First Foundation Inc FFWM M $ 16.34 93.0 1.30 1.52 0.0 12.6 0.86 14.57 18.86 86.64
First of Long Island Corp FLIC M $ 16.34 64.0 1.63 1.58 0.0 10.0 0.84 14.26 23.20 70.43
Flagstar Bancorp Inc FBC N $ 29.43 74.0 3.99 4.05 0.0 7.4 0.51 8.63 34.45 85.44
Franklin Resources, Inc. BEN N $ 20.97 59.0 1.95 1.85 -4.2 10.8 0.68 11.58 22.60 92.80
General Mills, Inc. GIS N $ 61.65 96.0 3.48 3.56 5.6 17.7 1.10 18.66 64.91 94.98
Group 1 Automotive, Inc. GPI N $ 65.97 60.0 8.93 8.01 0.0 7.4 0.61 10.38 92.67 71.19
Hannon Armstrong Sustnbl Infrstr Cap Inc HASI N $ 28.46 71.0 1.34 1.46 3.0 21.3 2.40 40.85 54.51 52.21
HB Fuller Co FUL N $ 44.60 85.0 2.38 2.51 8.0 18.8 1.20 20.39 48.43 92.09
Holly Energy Partners, L.P. HEP N $ 14.59 48.0 1.88 1.43 -1.8 7.7 0.86 14.53 27.37 53.31
Home Bancshares Inc HOMB M $ 15.38 73.0 1.31 1.05 0.0 11.8 0.84 14.28 18.68 82.34
Hope Bancorp Inc HOPE M $ 9.22 59.0 1.22 0.88 0.0 7.6 0.69 11.80 14.39 64.08
Huntington Bancshares Incorporated HBAN M $ 9.04 58.0 0.98 0.39 -23.1 9.3 0.70 11.86 11.58 78.03
IHS Markit Ltd INFO N $ 75.50 92.0 1.97 2.77 11.1 38.2 2.62 44.44 87.72 86.07
Invesco Ltd. IVZ N $ 10.76 51.0 1.02 1.54 -9.7 10.5 0.73 12.43 12.68 84.86
Johnson Controls International PLC JCI N $ 34.14 76.0 1.42 1.93 0.0 24.0 1.73 29.43 41.85 81.59
Kforce Inc. KFRC M $ 29.25 69.0 2.41 1.60 15.0 12.1 0.87 14.70 35.45 82.51
Kroger Co KR N $ 33.85 92.0 2.63 2.82 6.2 12.9 0.82 13.93 36.58 92.54
Lakeland Bancorp, Inc. LBAI M $ 11.43 65.0 1.32 1.16 0.0 8.7 0.74 12.51 16.49 69.30
Lamar Advertising Co LAMR M $ 66.76 69.0 3.59 2.36 0.0 18.6 1.13 19.20 68.97 96.80
Leggett & Platt, Inc. LEG N $ 35.15 63.0 2.35 1.25 0.0 15.0 0.99 16.74 39.30 89.43
Lincoln Electric Holdings, Inc. LECO M $ 84.24 86.0 4.47 2.86 8.5 18.8 1.22 20.80 92.99 90.59
LPL Financial Holdings Inc LPLA M $ 78.40 79.0 6.74 5.96 -3.1 11.6 0.83 14.18 95.60 82.01
MarineMax Inc HZO N $ 22.39 97.0 1.79 1.42 0.0 12.5 0.76 12.84 22.94 97.61
Maxim Integrated Products Inc. MXIM M $ 60.61 92.0 2.97 2.18 5.2 20.4 1.71 29.05 86.28 70.25
Middleby Corp MIDD M $ 78.94 55.0 6.42 3.93 0.0 12.3 1.24 21.10 135.47 58.27
Mohawk Industries, Inc. MHK N $ 101.76 65.0 10.19 3.62 -14.1 10.0 0.86 14.69 149.63 68.01
MSC Industrial Direct Co Inc MSM N $ 72.81 91.0 4.82 4.37 0.0 15.1 0.94 16.04 77.22 94.28
Nasdaq Inc NDAQ M $ 119.47 98.0 4.37 5.62 7.5 27.3 1.93 32.74 143.21 83.42
Northern Trust Corporation NTRS M $ 79.34 72.0 6.70 5.52 -9.3 11.8 0.87 14.76 98.90 80.22
Nu Skin Enterprises, Inc. NUS N $ 38.23 75.0 2.70 2.21 -14.9 14.2 1.09 18.58 50.08 76.33
Old Second Bancorp Inc OSBC M $ 7.78 56.0 1.03 0.57 0.0 7.6 0.71 12.12 12.45 62.48
Oshkosh Corp OSK N $ 71.62 75.0 6.99 4.02 -6.5 10.2 0.76 12.91 90.30 79.32
PACCAR Inc PCAR M $ 74.85 90.0 6.10 2.79 -5.8 12.3 0.92 15.59 95.08 78.72
PennyMac Financial Services Inc PFSI N $ 41.79 97.0 8.03 10.16 0.0 5.2 0.68 11.54 92.61 45.12
Penske Automotive Group, Inc. PAG N $ 38.71 72.0 4.73 2.73 0.0 8.2 0.54 9.19 43.50 88.99
Pentair PLC PNR N $ 37.99 80.0 2.25 2.05 3.4 16.9 1.47 24.97 56.20 67.60
Philip Morris International Inc. PM N $ 70.06 78.0 4.91 4.89 4.1 14.3 1.01 17.18 84.31 83.10
Pinnacle Financial Partners Inc PNFP M $ 41.99 65.0 4.38 3.62 0.0 9.6 0.84 14.34 62.78 66.89
Portland General Electric Company POR N $ 41.81 66.0 2.48 2.39 4.2 16.9 1.04 17.60 43.61 95.87
Progressive Corp PGR N $ 80.11 94.0 6.06 6.18 0.6 13.2 0.79 13.40 81.23 98.62
PulteGroup, Inc. PHM N $ 34.03 72.0 3.83 3.18 2.0 8.9 0.57 9.72 37.23 91.39
Quanta Services Inc PWR N $ 39.23 89.0 2.17 3.16 8.8 18.1 1.19 20.14 43.60 89.97
Raymond James Financial, Inc. RJF N $ 68.83 67.0 6.75 4.98 -6.1 10.2 0.78 13.20 89.04 77.30
Reliance Steel & Aluminum Co RS N $ 94.93 78.0 8.46 5.91 2.6 11.2 0.66 11.24 95.06 99.86
RMR Group Inc RMR M $ 29.47 58.0 1.85 1.83 0.0 15.9 1.20 20.39 37.74 78.08
Sally Beauty Holdings, Inc. SBH N $ 12.53 57.0 1.74 1.08 -5.2 7.2 0.71 12.07 21.00 59.65
Scotts Miracle-Gro Co SMG N $ 134.47 89.0 5.32 5.79 0.0 25.3 1.53 25.92 137.89 97.52
Sempra Energy SRE N $ 117.23 72.0 6.34 7.35 5.4 18.5 1.40 23.79 150.83 77.73
Sierra Bancorp BSRR M $ 18.88 63.0 2.26 1.73 0.0 8.4 0.75 12.82 28.97 65.18
Signature Bank SBNY M $ 106.92 72.0 10.12 9.21 0.0 10.6 0.86 14.60 147.78 72.35
Sleep Number Corp SNBR M $ 41.64 68.0 3.26 1.53 -10.6 12.8 1.03 17.50 57.10 72.93
Sprouts Farmers Market Inc SFM M $ 25.59 95.0 1.57 1.64 10.2 16.3 1.25 21.20 33.24 76.99
State Street Corp STT N $ 63.55 74.0 5.81 5.79 -4.1 10.9 0.73 12.39 71.92 88.36
Stock Yards Bancorp Inc SYBT M $ 40.20 94.0 2.79 2.58 0.0 14.4 0.85 14.43 40.27 99.83
SVB Financial Group SIVB M $ 215.53 80.0 18.84 12.73 8.0 11.4 0.83 14.08 265.29 81.24
SYNNEX Corporation SNX N $ 119.77 78.0 9.74 10.66 8.6 12.3 0.76 12.89 125.55 95.39
Taylor Morrison Home Corp TMHC N $ 19.29 68.0 1.64 1.52 0.0 11.7 1.27 21.63 35.52 54.31
Teleflex Incorporated TFX N $ 363.98 91.0 11.69 10.04 12.0 31.2 1.98 33.61 392.73 92.68
Tempur Sealy International Inc TPX N $ 71.95 72.0 4.06 3.56 0.0 17.7 1.51 25.60 103.93 69.23
The Western Union Company WU N $ 21.62 76.0 2.48 1.66 8.1 8.7 1.09 18.51 45.91 47.10
TRI Pointe Group Inc TPH N $ 14.69 79.0 1.71 1.30 0.0 8.6 0.51 8.69 14.88 98.75
UBS Group AG (USA) UBS N $ 11.54 86.0 1.27 1.06 10.7 9.1 0.73 12.48 15.86 72.76
United Rentals, Inc. URI N $ 149.04 88.0 15.33 12.10 0.0 9.7 0.63 10.72 164.33 90.69
Valley National Bancorp VLY M $ 7.82 64.0 0.76 0.90 0.0 10.3 0.89 15.16 11.53 67.85
Virtus Investment Partners Inc VRTS M $ 116.29 82.0 7.75 13.35 3.4 15.0 0.93 15.79 122.35 95.05
Vulcan Materials Company VMC N $ 115.85 76.0 4.64 4.30 7.6 25.0 2.00 33.98 157.53 73.54
WW International Inc WW M $ 25.38 54.0 1.78 1.73 0.0 14.2 1.04 17.72 31.61 80.28
Zions Bancorporation NA ZION M $ 34.00 65.0 3.15 1.94 -32.4 10.8 0.81 13.82 43.58 78.02

Source: AAII's Stock Investor and Refinitiv. Note: blank values in fields represent "na"

Learn How To Do It

Invest Using The P/E Relative Screening Model

At a Glance

Guru

Factors
Value, Earnings Estimates

YTD Performance
-15.7%

5-Year Performance
3.7%

Performance Since Inception
13.1%

Performance data
as of 6/30/2020

A screen that looks at the relationship of a stock's price-earnings ratio to that of the industry and market. 

P/E Relative Screen represents AAII's interpretation of the investment approach and is not determined by the original strategist. The list of passing companies represents a hypothetical portfolio, which is used to track the screen's performance on a chart.

The price-earnings ratio, or earnings multiple, is one of the most popular measures of company value. It is computed by dividing the current stock price by earnings per share for the most recent 12 months. It is followed so closely because it relates the market's expectation of future company performance, embedded in the price component of the equation, to the company's actual recent earnings performance. The greater the expectation, the higher the multiple of current earnings investors are willing to pay for the promise of future earnings.

If the market has low earnings growth expectations for a firm, or views earnings as suspect, it will not be willing to pay as much per share as it would for a firm with high and more certain earnings growth expectations.

That does not mean that all stocks with low price-earnings ratios have little or no growth prospects. While most firms deserve their low ratios, value investors seek companies with low price-earnings ratios in the belief that through neglect or overreaction to bad news, the market has not correctly evaluated the earnings potential of the company. Value investors argue that although the market may be efficient in the long term, emotions often dominate in the short run. These emotions can overtake rational analysis, pushing a stock's price above its intrinsic value during periods of euphoria and below its true worth when reacting to bad news.

The Price-Earnings Ratio

There are models to help gauge if a company's price-earnings ratio is reasonable. The relative price-earnings ratio approach looks back at the relationship of the price-earnings ratio of a stock either to the price-earnings ratio of the overall market or to the company's industry.

The price-earnings relative is determined by dividing a company's price-earnings ratio by that of the market. Based on relative growth and risk expectations, companies trade at multiples greater or smaller than that of the market multiple. One would expect a company with prospects better than the market, or with lower risk, or both, to have a higher price-earnings ratio than the market. Comparing a firm to its industry is an equally useful technique that has the benefit of isolating interesting candidates within a specific industry.

Changes in the relative levels of the price-earnings ratio may signal that the market, for whatever reason, is changing its expectations about the future earnings potential of a firm, or not paying attention and mispricing the security. It may also signal that a short-term change has already occurred or is expected to occur. The price-earnings relative valuation model, however, assumes that the long-term growth and risk profile of the firm has not fundamentally changed over time. A careful evaluation of each firm's relative price-earnings ratio must be undertaken before investing to determine if it represents a reasonable relationship to the market going forward.

A price-earnings relative average above 1.00 would indicate that a company's price-earnings ratio is typically above the market's price-earnings ratio, while a price-earnings relative average below 1.00 would indicate that a company's price-earnings ratio tends to be lower than the market's. Changes in the price-earnings relatives compared to average levels may indicate a misvaluation.

Publications such as Value Line publish relative price-earnings ratios, but you can also calculate the figure yourself.

Estimating Stock Value using the P/E Relative Model

Table 1 provides an example of the price-earnings relative model applied to Intel. The table shows how the relative P/E ratio for Intel has increased from a level roughly equal to the market in 1995 to trading at twice the level of the market during 1999.

Table 1. Calculating the Price-Earnings Relative
  Market Data Price-Earnings Ratio Company Data: Intel (Nasdaq: INTC)
Stock Price EPS ($) Price-Earnings Ratio P/E Relatives to Market
High (X) Low (X) High ($) Low ($) High (X) Low (X) High (X) Low (X)
1999 21.15 11.05 44.750 25.060 1.05 42.62 23.87 2.02 2.16
1998 24.85 12.59 31.550 16.410 0.86 36.69 19.08 1.48 1.52
1997 24.00 13.23 25.500 15.720 0.97 26.29 16.21 1.10 1.23
1996 21.98 13.00 17.690 6.230 0.73 24.23 8.53 1.10 0.66
1995 20.42 11.92 9.800 3.940 0.50 19.60 7.88 0.96 0.66
5-Year Average 22.48 12.36 -- -- -- 29.89 15.11 1.33 1.25
Average Relative Price-Earnings Ratios:
1.33 = Five-year high
1.25 = Five-year low
1.29 = Five-year average
$40.375 = Current stock price
$1.35 = Trailing 12 month company EPS
$1.65 = Expected next annual company EPS (I/B/E/S)
29.91 = Current stock price-earnings ratio
13.40 = Current market price-earnings ratio
Price-Earnings Ratio, based on relative ratio and current market ratio:
Adjusted P/E = Current Market P/E X Average Stock P/E Relative
= 13.40 X 1.29
= 17.29
Stock Valuation (Using Trailing EPS):
Stock Valuation = Adjusted P/E X EPS
= 17.29 X $1.35
= $23.34
Share Price as a Percent of Valuation = Current Price / Valuation
= $40.375 / $23.34
= 1.730 or 173.0%
Stock Valuation (Using Expected EPS):
Stock Valuation = Adjusted P/E X EPS
= 17.29 X $1.65
= $28.53
Share Price as a Percent of Valuation = Current Price / Valuation
= 40.375 / $28.53
= 1.415 or 141.5%
Source: AAII's Stock Investor Pro, Market Guide, I/B/E/S

Data as of 10/13/2000



The complete domestic stock market universe within AAII's Stock Investor Pro was used to determine median price-earnings ratios for the last five years. The numbers are consistent with the median market figures reported in Value Line's Selection and Opinion publication. Standard and Poor's also reports price-earnings ratios for a number of market indexes. AAII members can view historical ratios and index performance of select S&P indexes by clicking on the S&P Reports link found within the Tools area leads members to data on individual companies and market indexes.

Multiplying the market's current price-earnings ratio by the company's price-earnings relative provides an adjusted price-earnings ratio. As of October 13, 2000 the median market price-earnings ratio was 13.4, down dramatically from its level of 14.5 one month ago. With a price-earnings ratio of 29.91, Intel's current price-earnings relative is 2.23. This significantly higher above it's 1.29 five year average. The assumption behind this model is that the market is currently fairly valued and the company's relationship to the market will return to its norm. A stock price valuation can be determined by multiplying the adjusted price-earnings ratio by earnings per share. The example in the Table 1 uses both trailing earnings per share and expected earnings per share to estimate a fair market value.

Dividing the current price by the valuation provides a useful screening measure; 1.00, or 100%, indicates that the valuation and current stock price are equal. Figures above 100% may point to stock prices above valuation estimates, while figures below 100% may highlight undervalued companies. In our example Intel is overvalued using both the historical and expected earnings per share.

Screening for Undervalued Stocks Based Upon P/E Relatives

Stock Investor Pro, AAII's stock screening program, and company database is used to performing the screen. To ensure reasonable liquidity our first screen looks for stocks traded on Nasdaq, the New York Stock Exchange, and the American Stock Exchange. We also eliminate American depositary receipt firms (ADRs), which are foreign companies that are traded on U.S. exchanges.

The next set of filters requires that the firms have five years of data and that the earnings per share be positive for each of the last five years. A price-earnings ratio can only be calculated with positive earnings per share.

Beyond negative earnings, which lead to meaningless price-earnings ratios, unusually low earnings may also throw off standard price-earnings ratio screens. Short-term drops in earnings due to incidents such as special charges, extraordinary events, or in some cases even recessions may lead to unusually high price-earnings ratios. As long as the market interprets the earnings decrease as temporary, the stock price may not fall as dramatically as the earnings, resulting in a high price-earnings ratio. Because the average price-earnings relative model relies on a normal situation, these "outlier" price-earnings ratios should be excluded.

When performing a hands-on evaluation, you can manually exclude years with negative earnings or unusually high price-earnings ratios. However, when screening a large universe of stocks, it is best to establish criteria that try to eliminate companies with extreme price-earnings ratios. For our screen, companies with ratios above 100 for any of the last five fiscal years are excluded. If you want to be more conservative, a tighter requirement, such as ratios above 40 or 50, might be specified.

We do not screen for minimum historical or expected growth rates, but the table of passing companies indicates the consensus estimated earnings per share growth for the next three to five years. It is important to remember that the growth rate is a raw growth figure that does not necessarily divulge any change in trend or indicate the variability of earnings. The easiest and most direct way to judge earnings is to examine the earnings directly year-by-year, looking for stability and accelerating growth. As a basic screen, positive earnings per share from continuing operations for the most recent 12 months and each of the last five years are required. Screens that are more stringent would require increases in each of the last five years or even an increase in the year-to-year growth rate for each of the last five years.

It is important to look at factors leading to the growth and determine if the growth is sustainable. When examining a firm's earnings patterns, it is necessary to carefully read both quarterly and annual reports, which can clue you in to possible explanations of the earnings growth pattern. Was a significant portion of the earnings growth achieved through acquisition or internal growth? Did earnings growth from franchises come from increases in same-store sales or the opening of new stores? Did currency translations impact earnings? Are competitive conditions changing within the industry? Are margins increasing or decreasing?

The table of passing companies (see link in right-hand navigation) includes companies with current prices below their valuation estimates computed with trailing earnings per share and five-year average price-earnings relatives. The stocks are ranked on the price as a percent of price-earnings relative valuation. To arrive at the valuation, the earnings per share for the last 12 months was multiplied by the adjusted price-earnings ratio. We followed the trailing earnings implementation presented in
Table 1. The current company and industry price-earnings ratio is provided to help gauge the valuation level of each firm's industry.

Investors often look for a catalyst to help attract attention to a company and boost its stock price. The stock prices of many attractively priced stocks often languish until investors find a reason to re-evaluate the prospects of the firm or its industry. Upward earnings revisions and positive earnings surprises are events that make investors take notice of a company. Revisions to earnings estimates lead to price adjustments. When earnings estimates are revised significantly, stocks tend to show above-average performance. Stock prices of firms with downward revisions tend to show below-average performance after the adjustment. Changes in estimates reflect changes in expectations of future performance. Perhaps the economic outlook is better than previously expected, or maybe a new product is selling better than anticipated. For our screen, we require upward revisions to current and next year's earnings over the last month.

Price momentum is often used as a signal that the market has recognized that the stock price is reacting to either proven performance, or an increase in expectations. Investors look for stock price performance superior to that of other stocks with the belief that the rising price will attract other investors, who will drive up the price even more. The current market price as a percentage of the 52-week high price is a popular measure of price strength and momentum. If a firm's stock price continues to be strong, it should be trading near its 52-week high. The figure is provided in the table of passing companies to help gauge recent price behavior.

Conclusion

Screening for stocks by looking at price-earnings ratios can help highlight firms that have fallen out of favor. Price-earnings relatives help establish benchmark comparisons that help identify firms that have deviated from their normal valuation level-with the critical assumption that nothing fundamental to the company, industry, or market has changed significantly. The analysis can highlight companies worthy of further analysis given the expectation they will move back to their typical levels.

In constructing screening criteria, you may wish to include a number of conditioning criteria that help indicate items such as the future earnings potential of the firm, the financial strength of the firm, as well as the strength of the firm within its industry. Investing in low price-earnings stocks can be rewarding, but caution is required.

Simply looking at historical price-earnings ratios, stock prices, and earnings is informative. The price-earnings approach is far from a secret and will only be successful if the inputs-your expectations-are proven to be well-founded.

  • Those companies that trade as American Depository Receipts (ADRs) are not included

  • Those companies that trade on the over the counter (OTC) market are not included

  • At least three analysts provide earnings estimates for the current fiscal year (Y0)

  • The current consensus earnings estimate for the current fiscal year (Y0) is greater than it was one month ago

  • The number of upward revisions in earnings estimates for the current fiscal year (Y0) is greater than the number of downward revisions in earnings estimates for the current fiscal year (Y0)

  • There has been at least one upward revision in the earnings estimates for the current fiscal year (Y0)

  • The current consensus earnings estimate for the next fiscal year (Y1) is greater than it was one month ago

  • The number of upward revisions in earnings estimates for the next fiscal year (Y1) is greater than the number of downward revisions in earnings estimates for the next fiscal year (Y1)

  • There has been at least one upward revision in the earnings estimates for the next fiscal year (Y1)

  • The price-earnings relative valuation as a percentage of the current stock price is less than 75%

  • The average price-earnings ratio for each of the last five fiscal years are less than or equal to 100