Stocks & Bonds
How to Take the Market's Pulse
The most useful price-earnings ratio.
By Manuel Schiffres, Executive Editor
From Kiplinger's Personal Finance magazine, February 2010
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The price-earnings ratio is a key measure of the stock market’s value. But some P/Es are more meaningful than others. Below, we look at five ways to determine the P/E of Standard & Poor’s 500-stock index, based on five ways of calculating the all-important E. P/Es are as of April 9, 2010.
23.4 The Kitchen-Sink P/E
E based on past earnings as reported. The figure used here, also known as trailing earnings, reflects profits in the previous four quarters, a number that has been depressed recently by the recession and huge write-offs. This profit number is based on generally accepted accounting principles. At any rate, investors look ahead, and this P/E looks backward. Usefulness: MINIMAL
21.0 The Clean P/E
E based on past earnings from operations. This profit number is also based on the previous four quarters of activity. But it excludes write-offs and other extraordinary events, so it reflects reality better than the P/E based on reported earnings. Like that figure, however, it is backward-looking. Usefulness: MINIMAL
18.8 The Rube Goldberg P/E
E based on average earnings over a long economic cycle. This figure is based on the work of the Leuthold Group, which uses 4.5 years of actual results and six months of estimated profits to determine the E. Although Leuthold’s numbers mostly look backward, they do capture the ups and downs of economic cycles. Usefulness: GOOD
15.3 The Guru P/E
E based on strategists’ earnings forecasts for 2010. This profit number represents the average earnings for the S&P 500 as estimated by brokerage-firm strategists. It’s forward-looking -- a plus because it’s in sync with the way investors operate. Strategists tend to be late in catching on to major turns in the economy. Still, this is OUR FAVORITE P/E.
14.8 The Rose-Colored-Glasses P/E
E based on earnings estimates for 2010 by company analysts. Earnings are based on estimates for each company in the S&P 500, which are then added together and weighted according to company size. The P/E is forward-looking, but analysts tend to be overly optimistic about the companies they follow. Usefulness: SO-SO
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Reader Comments (9)
Posted by: Mike at 12/29/2009 09:37:26 AM
It would be helpful to have the historical P/E's for each of these methods to compare current values to. Even better to have the historical P/E's based upon the last 1, 3, 5, 10, 20, etc. year periods for each of these methods, to give it better historical context. Anyone know where I can find that information?
Posted by: George at 01/01/2010 03:25:58 PM
I agree with the need for historical context. For example, what was the "Guru P/E" coming into the September 2008 downturn?
Posted by: James at 01/01/2010 07:55:04 PM
Where do you find the The Guru P/E for stocks?
Posted by: Richard Pflueger at 01/08/2010 09:50:06 AM
What's the point of posting comments when no one replies?
Posted by: manny schiffres at 01/08/2010 02:22:49 PM
Gentlemen: Sorry for taking so long to respond. I'm author of this Kiplinger story, and I'm at the airport right now waiting to fly to not-so-warm Florida, so I won't be able to get this data till I'm back at the office next week. But I can answer James right now. Alas, the problem with this exercise is that it's not easy for the average person to get the "Es." The only ones that I know of that are publicly available are the two trailing numbers. You can go to S&P's web site and call up a spreadsheet that has the previous 4 quarters of results for both operating and GAAP earnings for the 500. That web site also has, if I recall correctly, S&P's own estimates for 2010 earnings. The earnings we use in the "guru" PE come from Thomson Reuters, which adds up the estimate from all the strategists (gurus) who report to Thomson and then comes up with an average earnings estimate. To my knowledge, those numbers are not available to the general public. As an alternative, take any guru's estimate you can find and divide that into the current level of the S&P 500. If you deal with a full-service brokerage, eg, you can ask your broker to find out what his/her firm is estimating for S&P earnings. One comment about PE ratios. Historically, they're closely correlated to interest rates and inflation. At the end of the 73-74 and 81-82 bear markets, the market's PE bottomed in the single digits. In the 00s, bear markets ended at much higher PEs, reflecting the much lower interest rates and inflation rates of more recent times. Hope this helps. I'll be writing more next week. Manny
Posted by: David Yoakam at 01/15/2010 10:14:03 PM
S&P does provide estimates of PE from both a top down and bottom up perspective at their site www.standardandpoors.com/indices/market-attributes/en/us click on the tab S&P 500 Earnings and Estimates are listed for As Reported and Operating, but neither seems to provide the Guru P/E described in the article. Good historical data too.
Posted by: John at 02/06/2010 07:41:47 AM
Good info, but not having a source for these PE's I could have saved myself the trouble of reading the article. I'm not looking forward to more of this kind of "help".
Posted by: Mark at 02/09/2010 09:04:36 AM
Unfortunately I have to agree with John, what is the use of publishing information like this that the public can not get their hands on!!
Posted by: Lynda at 08/31/2010 04:16:55 PM
I can't agree with John or Mark on their emphatic comments. I found this article helpful on an education level. I didn't know the "E" was calculated in so many ways and from what sources. Now I do and I feel better about that "E" number. If you base your investing on time-tested strategies using the "E" that is commonly posted on websites, you can still continue with the same strategy. If that strategy isn't working - it isn't because where the "E" is coming from.