When Should You Sell AEW UK REIT plc (LSE:AEWU)?
AEW UK REIT plc (LSE:AEWU) is currently trading at a trailing P/E of 20.1x, which is higher than the industry average of 14.1x. While this makes AEWU appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. Check out our latest analysis for AEW UK REIT
Breaking down the P/E ratio
P/E is a popular ratio used for 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 pound of the company’s earnings.
P/E Calculation for AEWU
Price-Earnings Ratio = Price per share ÷ Earnings per share
AEWU Price-Earnings Ratio = 1.01 ÷ 0.05 = 20.1x
The P/E ratio itself doesn’t tell you a lot; however, it becomes very insightful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as AEWU, such as size and country of operation. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. AEWU’s P/E of 20.1x is higher than its industry peers (14.1x), which implies that each dollar of AEWU’s earnings is being overvalued by investors. As such, our analysis shows that AEWU represents an over-priced stock.
A few caveats
However, before you rush out to sell your AEWU 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 AEWU. 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 AEWU, 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 AEWU to are fairly valued by the market. If this does not hold, there is a possibility that AEWU’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 AEWU. 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 AEWU, 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 AEW UK REIT 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.
