Should You Be Tempted To Sell Global Net Lease Inc (GNL) Because Of Its PE Ratio?
Global Net Lease Inc (NYSE:GNL) trades with a trailing P/E of 36.6x, which is higher than the industry average of 33.4x. 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 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 Global Net Lease
Breaking down the P/E ratio
A common ratio used for relative valuation is the P/E ratio. 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 GNL
Price-Earnings Ratio = Price per share ÷ Earnings per share
GNL Price-Earnings Ratio = 21.8 ÷ 0.595 = 36.6x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to GNL, such as capital structure and profitability. A common peer group is companies that exist in the same industry, which is what I use. GNL’s P/E of 36.6x is higher than its industry peers (33.4x), which implies that each dollar of GNL’s earnings is being overvalued by investors. Therefore, according to this analysis, GNL is an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that GNL should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to GNL. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with GNL, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing GNL to are fairly valued by the market. If this does not hold true, GNL’s lower P/E ratio may be because firms in our peer group are 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 GNL. 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 GNL has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.
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 Global Net Lease 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.
