Question

If a stock is overvalued, but it’s PE ratio is well under the industry average PE ratio, what conclusion could you make?

Answer 1

If stock is overvalued but the price to earning ratio of the stock is still below the industry average, it means that it is comparatively undervalued to the industry average and to its peers as well.

It means that industry is a highly growing industry or the industry commands a premium and all the companies which are part of this industry are trading at a higher price to earning multiple, and this particular company is still not able to trade at those multiple which is equivalent to industry.

It can be implied that the share is not able to perform as per the industry standards, but it is getting advantage because it is a part of the industry and it is also valued at high price to earning.it can be always beneficial for the shareholders to stay with those players who are the leaders of the particular industry and in this case, this share is not the leader of the particular industry because this is not valued to the industry price to earning, and it can be said that this share is a laggard in the whole industry.

So, I derive a conclusion that this share is not the leader of the industry and there are other players who are highly valued in this industry so I would be buying them if I had to play through growth strategy, and I would be avoiding this share because this share is a laggard in this whole segment because it is not given proper valuation according to the industry standards and the probable reasons for undervaluation could be it's underperformance.