Is WSFS Financial Corporation’s (NASDAQ:WSFS) PE Ratio A Signal To Sell For Investors?
WSFS Financial Corporation (NASDAQ:WSFS) is trading with a trailing P/E of 23.5x, which is higher than the industry average of 21.9x. While WSFS might seem like a stock to avoid or sell if you own it, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. 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. Check out our latest analysis for WSFS Financial
What you need to know about 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 WSFS
Price-Earnings Ratio = Price per share ÷ Earnings per share
WSFS Price-Earnings Ratio = $51.3 ÷ $2.186 = 23.5x
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 WSFS, 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. WSFS’s P/E of 23.5x is higher than its industry peers (21.9x), which implies that each dollar of WSFS’s earnings is being overvalued by investors. As such, our analysis shows that WSFS represents an over-priced stock.
A few caveats
While our conclusion might prompt you to sell your WSFS shares immediately, there are two important assumptions you should be aware of. Firstly, our peer group contains companies that are similar to WSFS. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you are comparing lower risk firms with WSFS, 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 WSFS to are fairly valued by the market. If this does not hold true, WSFS’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 rebalance your portfolio and reduce your holdings in WSFS. 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for WSFS’s future growth? Take a look at our free research report of analyst consensus for WSFS’s outlook.
Past Track Record: Has WSFS 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 WSFS’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.
