The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Cheniere Energy Partners LP Holdings LLC (NYSEMKT:CQH)’s fundamentals and stock market performance.
Cheniere Energy Partners LP Holdings LLC (NYSEMKT:CQH) trades with a trailing P/E of 30.5x, which is higher than the industry average of 13.4x. While CQH might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. Today, I will break down what the P/E ratio is, how to interpret it and what to watch out for. See our latest analysis for Cheniere Energy Partners Holdings
Demystifying the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for CQH
Price-Earnings Ratio = Price per share ÷ Earnings per share
CQH Price-Earnings Ratio = $31.21 ÷ $1.022 = 30.5x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to CQH, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. CQH’s P/E of 30.5x is higher than its industry peers (13.4x), which implies that each dollar of CQH’s earnings is being overvalued by investors. Therefore, according to this analysis, CQH is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your CQH shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to CQH, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with CQH, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing CQH to are fairly valued by the market. If this does not hold, there is a possibility that CQH’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
You may have already conducted fundamental analysis on the stock as a shareholder, so its current overvaluation could signal a potential selling opportunity to reduce your exposure to CQH. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for CQH’s future growth? Take a look at our free research report of analyst consensus for CQH’s outlook.
- Past Track Record: Has CQH been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CQH’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.