Does Winmark Corporation’s (WINA) PE Ratio Signal A Selling Opportunity?
Winmark Corporation (NASDAQ:WINA) is trading with a trailing P/E of 24.4x, which is higher than the industry average of 15.8x. While WINA 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 deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for WINA
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. 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 WINA
Price-Earnings Ratio = Price per share ÷ Earnings per share
WINA Price-Earnings Ratio = 137.8 ÷ 5.638 = 24.4x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful 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 WINA, such as company lifetime and products sold. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. WINA’s P/E of 24.4x is higher than its industry peers (15.8x), which implies that each dollar of WINA’s earnings is being overvalued by investors. As such, our analysis shows that WINA represents an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your WINA shares, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to WINA. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with WINA, then its P/E would naturally be lower than its peers, as investors would value those with lower risk at a higher price. The second assumption that must hold true is that the stocks we are comparing WINA to are fairly valued by the market. If this does not hold, there is a possibility that WINA’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
Are you a shareholder? 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 WINA. 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.
Are you a potential investor? If you are considering investing in WINA, looking at the PE ratio on its own is not enough to make a well-informed decision. You will benefit from looking at additional analysis and considering its intrinsic valuation along with other relative valuation metrics like PEG and EV/Sales.
PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on Winmark for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn't properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.
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.
