To the annoyance of some shareholders, Newmark Group (NASDAQ:NMRK) shares are down a considerable 37% in the last month. The recent drop has obliterated the annual return, with the share price now down 16% over that longer period.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Does Newmark Group Have A Relatively High Or Low P/E For Its Industry?
Newmark Group's P/E of 12.70 indicates relatively low sentiment towards the stock. The image below shows that Newmark Group has a lower P/E than the average (18.6) P/E for companies in the real estate industry.
Newmark Group's P/E tells us that market participants think it will not fare as well as its peers in the same industry. Since the market seems unimpressed with Newmark Group, it's quite possible it could surprise on the upside. You should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. If earnings are growing quickly, then the 'E' in the equation will increase faster than it would otherwise. That means unless the share price increases, the P/E will reduce in a few years. Then, a lower P/E should attract more buyers, pushing the share price up.
Newmark Group shrunk earnings per share by 9.1% last year.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. Thus, the metric does not reflect cash or debt held by the company. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Newmark Group's Balance Sheet
Newmark Group's net debt equates to 31% of its market capitalization. You'd want to be aware of this fact, but it doesn't bother us.
The Verdict On Newmark Group's P/E Ratio
Newmark Group's P/E is 12.7 which is below average (15.1) in the US market. The debt levels are not a major concern, but the lack of EPS growth is likely weighing on sentiment. Given Newmark Group's P/E ratio has declined from 20.1 to 12.7 in the last month, we know for sure that the market is significantly less confident about the business today, than it was back then. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.
But note: Newmark Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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