If buying value stocks were such a viable strategy, why would one not want to create a portfolio of all stocks that had a P/E lets say in the range of 0.1-5.0, with a mean of 2.1, and wait until until the mean had doubled to 4.2 and then sell the protfolio? Why would this not be a better strategy than creating a portfolio of all stocks with a P/E of betwen 5.1-10.0? Many wisened veterans are always saying to buy value stocks. Well, why not buy the biggest value in the value stocks, and go toward the lowest end of the range? I know the difficulty of having to buy all these stocks, but for the sake of argumant, say you could buy and sell a mutual fund at one NAV, or an ETF that tracks these stocks. I've never heard anyone aspouse this particular logic. Is it that the mean would more likely drift lower toward 0 than higher for such already low P/E stocks? If I'm going to be a value investor, why not buy the biggest values?
i think thats a fools game. not being condescending,its just my opinion based on trading for a while. you have to look at the growth rate and the technicals(much more important). just buying low p/e stocks is a strategy employed by lazy fund managers who fail to adapt to the new market dynamics.
Stocks with a low p/e have a low p/e for a reason. Chances are the low pe means that either they don't grow the business, or the business is extremely cyclical in nature. If you are going to play the p/e game you have to know the "typical p/e" given to each sector and find something lower. The only time that will happen is right AFTER A BEAR MARKET. When looking at p/e in a bull market you can only look at the p/e relative to ones peers and try to find discrepancies.
If a stock were highly cyclical, wouldn't a low P/E indicate that it is near the bottom of that cycle, and thus a good time to buy? Perhaps this method is looking for absolute value, when in reality, a better strategy is to look for relative value. That is value relative to ones industry group. Would it even be meaningful to try and value one industry group relative to another industry group? For example, if consumer staples has a mean P/E lower than airlines, does that indicate anything? Maybe that would be trying to look for absolute value, but just between industry groups instead of individual stocks.
A low P/E method is based on an oversimplification of the markets. If you are looking for growth, you'll miss ALOT of opportunities this way. Why not just invest in GREAT companies regardless of the P/E. Now that's value!
Yes a low pe of a highly cyclical stock could indicate it is near its bottom, but that bottom could last for years and years. I'll use metals and mining as an example because that has been my professional industry group for 30 years. The typical pe for that industry is between 4-10. It pretty much stayed there for many years. An investment in a steel company wouldn't have yielded you any profit, and many of the companies filed for bankruptcy which would have given you a total loss. Now we have china and india eating up the world's natural resources. All of a sudden these companies are now growth companies, at least temporarily. Growth is where you make money because the market puts value on growth. Value investors don't look for low pe. They look for growth at a reasonable price.
This is just my opinion on this issue. At any given time either growth or value is in fashion. In the end of 2000, if you had invested in the Russell 2000 value index then you would now by up more then 2.5 times. However, if you invested in the Russell 2000 growth index then you would be breaking even right about now. For the last 7 years value has been in fashion, but now I believe growth will be the one to take charge while value pulls back. Look at All-State insurance which is your classic value stock. Its down over 10% on the year and going lower, probably a good short right now. All-State is a great company, but the shares are not this year's color. I know its simplistic for me to say that something is in fashion. There are more complex explanations. All we need to know is which set of stocks are going up or going down. In 1996, growth took charge where as value had the backseat then the baton was passed to value in 2000 and now it will be passed again. In the year 2000, the entire stock market did not go down. It was simply that growth stocks dominated the indexes so it had the look and perception that the market was going down. Stocks like All-State and Progressive had banner years in 2000 and 2001. Now value stocks are the ones that dominate the indexes...Value bubble 2007...