Should You Be Tempted To Sell Arlington Asset Investment Corp (NYSE:AI) Because Of Its PE Ratio?
Arlington Asset Investment Corp (NYSE:AI) trades with a trailing P/E of 16.7x, which is higher than the industry average of 16.4x. While this makes AI 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. See our latest analysis for Arlington Asset Investment
Breaking down the P/E ratio
P/E is often used for relative valuation since earnings power is a chief driver of investment value. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for AI
Price-Earnings Ratio = Price per share ÷ Earnings per share
AI Price-Earnings Ratio = $11.16 ÷ $0.67 = 16.7x
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 AI, such as company lifetime and products sold. A common peer group is companies that exist in the same industry, which is what I use. AI’s P/E of 16.7x is higher than its industry peers (16.4x), which implies that each dollar of AI’s earnings is being overvalued by investors. Therefore, according to this analysis, AI is an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that AI should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. The first is that our “similar companies” are actually similar to AI, or else the difference in P/E might be a result of other factors. For example, if you are comparing lower risk firms with AI, 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 AI to are fairly valued by the market. If this does not hold true, AI’s lower P/E ratio may be because firms in our peer group are overvalued by the market.
What this means for you:
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 AI. 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. 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 AI’s future growth? Take a look at our free research report of analyst consensus for AI’s outlook.
Past Track Record: Has AI 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 AI’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.
