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Warning: Do You Know Your P/E Ratio?

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·3 min read
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  • (0:45) - Understanding P/E Ratios: Breaking Down Funko

  • (9:50) - Tracey’s Top Picks Using P/E

  • (22:20) - Episode Roundup: FNKO, LEN, TSLA, W, GIII

  •                 Podcast@Zacks.com

 

Welcome to Episode #233 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio, shares some of her top value investing tips and stock picks.

Many value investors look for cheap stocks using a Price-to-Earnings ratio, otherwise known as the P/E ratio.

But do you know which P/E ratio you’re looking at?

Trailing Versus Forward P/Es

If you looked at the P/E ratio for toy company Funko FNKO on YahooFinance, you would see that it is 180x.

Shares are up over 90% year-to-date.

It sure sounds like that stock is expensive, right?

But YahooFinance uses the trailing P/E ratio on its summary page, which looks at last year’s earnings.

Other financial sites, like Zacks.com, using the forward P/E, which looks at analyst estimates of 2021’s earnings.

Funko’s forward P/E is just 23.

That’s a big difference if you’re trying to decide if the stock is “expensive” by looking at the P/E ratio.

Watch Earnings This Year

With many companies seeing depressed earnings in 2020 due to the COVID pandemic, the P/E ratios are going to be less reliable, depending on which ones you are looking at.

1.       Lennar LEN has a forward P/E of 9.5 which is similar to its trailing P/E ratio of 10.4. Shares are up big but the forward P/E is lower because earnings are expected to rise about 40% this year.

2.       Tesla TSLA seems to be crazy expensive, with a trailing P/E ratio of 1132. But earnings are expected to rise 90% year-over-year and the shares have gone up just 2% in 2021 which puts the forward P/E at just 167.

3.       Wayfair W was a pandemic winner in 2020 and earnings soared. But earnings are expected to fall 53% in 2021. Wayfair’s trailing P/E is 169 but the forward picture is cheaper, at 138x.

4.       G-III Apparel GIII really got hit in 2020 with earnings dropping significantly. On YahooFinance, it has a trailing P/E ratio of 65 which makes it seem expensive. But with earnings expected to rise 223% in 2021 as shoppers buy more dresses and jeans, it has a forward P/E on Zacks of just 13. That’s dirt cheap.

What else do you need to know about the P/E ratio and finding “value” stocks?

Tune into this week’s podcast to find out.

[In full disclosure, Tracey owns shares of FNKO in her personal portfolio.]

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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Tesla, Inc. (TSLA) : Free Stock Analysis Report
 
Lennar Corporation (LEN) : Free Stock Analysis Report
 
GIII Apparel Group, LTD. (GIII) : Free Stock Analysis Report
 
Wayfair Inc. (W) : Free Stock Analysis Report
 
Funko, Inc. (FNKO) : Free Stock Analysis Report
 
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Zacks Investment Research