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Right now, Wells Fargo Inc. (NYSE:WFC) share price is at $33.10, after a 4.78% drop. Over the past month, the stock spiked by 14.09%, but over the past year, it actually fell by 32.39%. With questionable short-term performance like this, and great long-term performance, long-term shareholders might want to start looking into the company's price-to-earnings ratio.
The stock is currently above from its 52 week low by 59.43%. Assuming that all other factors are held constant, this could present itself as an opportunity for investors trying to diversify their portfolio with Banks stocks, and capitalize on the lower share price observed over the year.
The P/E ratio measures the current share price to the company's EPS. It is used by long-term investors to analyze the company's current performance against its past earnings, historical data and aggregate market data for the industry or the indices, such as S&P 500. A higher P/E indicates that investors expect the company to perform better in the future, and the stock is probably overvalued, but not necessarily. It also shows that investors are willing to pay a higher share price currently, because they expect the company to perform better in the upcoming quarters. This leads investors to also remain optimistic about rising dividends in the future.
Most often, an industry will prevail in a particular phase of a business cycle, than other industries.
Compared to the aggregate P/E ratio of 18.16 in the Banks industry, Wells Fargo Inc. has a higher P/E ratio of 86.67. Shareholders might be inclined to think that Wells Fargo Inc. might perform better than its industry group. It's also possible that the stock is overvalued.
There are many limitations to price to earnings ratio. It is sometimes difficult to determine the nature of the earnings makeup of a company. Shareholders might not get what they're looking for, from trailing earnings.
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