Should You Be Tempted To Sell Costamare Inc (NYSE:CMRE) At Its Current PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Costamare Inc (NYSE:CMRE)’s fundamentals and stock market performance.
Costamare Inc (NYSE:CMRE) is trading with a trailing P/E of 17.4x, which is higher than the industry average of 16.5x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. View out our latest analysis for Costamare
Breaking down the Price-Earnings ratio
The P/E ratio is a popular ratio used in relative valuation since earnings power is a key 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 CMRE
Price-Earnings Ratio = Price per share ÷ Earnings per share
CMRE Price-Earnings Ratio = $7.67 ÷ $0.440 = 17.4x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. Our goal is to compare the stock’s P/E ratio to the average of companies that have similar attributes to CMRE, such as company lifetime and products sold. One way of gathering a peer group is to use firms in the same industry, which is what I’ll do. CMRE’s P/E of 17.4x is higher than its industry peers (16.5x), which implies that each dollar of CMRE’s earnings is being overvalued by investors. Therefore, according to this analysis, CMRE is an over-priced stock.
Assumptions to watch out for
However, before you rush out to sell your CMRE shares, it is important to note that this conclusion is based on two key assumptions. The first is that our “similar companies” are actually similar to CMRE, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with CMRE, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing CMRE to are fairly valued by the market. If this is violated, CMRE’s P/E may be lower than its peers as they are actually overvalued by investors.
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 rebalance your portfolio and reduce your holdings in CMRE. 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 CMRE’s future growth? Take a look at our free research report of analyst consensus for CMRE’s outlook.
Past Track Record: Has CMRE 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 CMRE’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.
