P/E and Forward P/E

[rapidacid]

Lately I've been working hard at dialing in my screening quant so I can be comfortable executing on what it spits out, ie. where should I put my next money?

I give 5% weight to current P/E and 5% weight to forward P/E, with a lower P/E resulting in a higher score. This itself is too black & white but its what I have right now ( I'd much rather be able to compare current and forward P/E's to historical averages but stockrover doesn't currenttly support that )

My question to the group is this: When you see a large discrepancy between current P/E and forward P/E, which current P/E being much higher, what does your gut tell you about that scenario?

My take is that it means one of two things:

1) Current price is discounted quite a bit to future value, accumulate
2) People are willing to pay a lot less for this companies earnings moving forward, hold / re-evaluate

More likely the answer lies somewhere in the middle and the correct answer looks something like "it depends"

Take QCOM for instance.

I have the following inputs:

Price: $73.51
TTM EPS: $4.48
Forward EPS EST: $5.56

Current P/E: 16.4
Forward P/E: 13.2

Last 10 year avg P/E: 23.82

Super rudimentary extrapolation gets us to a $91.18 price point using current P/E * Forward EPS EST ( 16.4 * 5.56 ) and $132.44 using 10 year avg P/E * Forward EPS EST ( 23.82 * 5.56 ). That's a 24% and 80% "discount" respectively.

In the QCOM specific instance the China situation has put a lot of uncertainty on the future there, and at this point we've mostly modeled where future mobile growth using QCOM's chips will come from thus resulting in forward multiples that aren't so wild wild west-y.

Maybe I've just answered my own question and that's all this game is: analyzing risk and placing your bets.

[Joey Batz]

While it's hard to say what a shrinking P/E means, I tend to take it as a good sign that the company's stock price will drop due to overvaluation. While you can never assume that, we also aren't looking at biotech penny stocks here. While it is possible that the company's fundamentals are bad and the drop in stock price will simply match that, at that point you're probably not worried about the P/E ratio anymore. It could also mean that the stock price will be going up and the company's earnings and whatnot will be going up even faster, which begs the philosophical question of will the company actually be more or less expensive in that case (less overvalued, but still a higher stock price).

With all that in mind though, I analyze everything and then decide if the company is cheap or expensive. I'm looking at SWR and BDX and just hoping that their smaller Forward Annual P/E's simply mean that the share price will drop to meet the companies' actual values. When you have great longtime dividend payers like them, a shrinking P/E is more likely to mean that than any sort of issue with the company itself.