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The GEO Group, Inc. Message Board

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  • mbj58 mbj58 Dec 20, 1999 9:45 AM Flag

    New Lows...Baby

    Flip

    Your looking at the right indicators,
    Return on Equity vs. PE, but your conclusions are
    exactly opposite from reality.

    You sound like an
    intelligent person, I am sure if you give it some thought you
    can understand this.

    Even if you don't
    understand how the analysis works, its really common sense.
    If you think about what your saying you will see how
    irrational your statement is.

    You say that the ROE is
    18.8% and the PE is 10, and therefore conclude that
    buying back stock would only generate a 10% return vs an
    18.8% return if they invest the cash in new
    projects.

    You may not understand how to calculate a companies
    ROE, but just think about how illogical that statement
    is.

    Under your logic that would mean that if the stock were
    currently selling at $40 per share, and had a PE of 40,
    that buying back stock would generate a 40% return.


    Your logic would imply that the higher the stock price
    goes, and the higher the PE goes, the greater the
    return from a buyback.

    Your saying you get a
    better ROE buying the stock when it is very high rather
    than when it is very low.

    The reality is that
    the exact opposite is true.

    I think even a
    novice investor can understand this even if he does not
    understand the exact way the calculation works.

    I'll
    give you credit for getting the right indicators to
    look at, but you have the relationship exactly
    backwards.

    Here is the basic rule. When the PE of the stock drops
    below the ROE, that is when a buyback starts to become
    attractive. The more the PE drops compared to the ROE the
    more attractive a buyback.

    Its an inverse
    relationship.

 
GEO
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