Should You Be Tempted To Buy Corcept Therapeutics Incorporated (NASDAQ:CORT) At Its Current PE Ratio?
Corcept Therapeutics Incorporated (NASDAQ:CORT) is currently trading at a trailing P/E of 14.9x, which is lower than the industry average of 23.2x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. Check out our latest analysis for Corcept Therapeutics
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 dollar of the company’s earnings.
P/E Calculation for CORT
Price-Earnings Ratio = Price per share ÷ Earnings per share
CORT Price-Earnings Ratio = $16.98 ÷ $1.137 = 14.9x
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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to CORT, such as capital structure and profitability. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. Since CORT’s P/E of 14.9x is lower than its industry peers (23.2x), it means that investors are paying less than they should for each dollar of CORT’s earnings. Therefore, according to this analysis, CORT is an under-priced stock.
A few caveats
Before you jump to the conclusion that CORT is the perfect buying opportunity, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to CORT, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with CORT, 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 CORT to are fairly valued by the market. If this does not hold true, CORT’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to add more of CORT to your portfolio. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned above. 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 highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for CORT’s future growth? Take a look at our free research report of analyst consensus for CORT’s outlook.
Past Track Record: Has CORT 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 CORT’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.
