10-08-2014, 10:54 AM
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.
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.