Question

In September 2012, the share price of Apple Inc. reached the record high of USD705. However, the price declined by 40% since then and was around 420 in March 2013. Financial analysts raised a few concerns about Apple’s prospects, including increased competition in the industry, uncertainty after the passing away of Steve Jobs, and controversy of its tax practice. Required:

b. In March 2013, a financial analyst recommended investors to buy Apple’s shares because “the forward P/E ratio for Apple is only 10, significantly below the historical average and current market average”. Please discuss whether it is appropriate to buy a stock solely based on low P/E ratios.

Answer 1

PE is one of the Most preferred indicators of the Stock Price. It Tends to Answer the Complex questions about any share which is - Is the Share is Overvalued or Undervalues?. The Complexity of Question and its answer defines the way the securities are bought or sold by investors, buy if it is undervalued and sell if it is overvalued.

But Solely dependency of PE is not good from an Investor Point of View, there are many other conditions which ensures that despite a low PE, the Company might not perform well in coming future. The Other Ratios, News which needs to be considered while selecting stock with a low PE are:-

1. Future Plans of Company: The Stock Price Highly depends on Earning of the Company and earning depends on the Future vision of the Company. For example, if a company plan to set up a new manufacturing unit in future, so it will increase it's earning in future, thus leads to increase in market price although the PE remains constant.

2. Current Economic Condition of the Company: The Growth of Company also depends on the Person who runs it. In case of Apple the Company is highly influenced by the vision of Steve jobs, thus results in the decrease in market price of apple by 40% on the death of steve jobs. The Managment also plays a Key Role In development of the Company.

3. EPS: One has to consider the EPS also in order to check for Investing, while a company stock might look lucrative due to low PE as Compared to industry, but the Low PE can also be Due to Low EPS of the Company.

So, above are some reasons why only PE is not to be considered while Investing in any stock as it might be misleading.