Investment strategy: Buy low P/E Ratio stocks

Price-Earning Ratio is calculated as (Current share price)/(Earnings per share), and and we usually write P/E. This ratio reflects how much the market is willing to pay for each dollar from earnings. For example, if the P/E ratio is 15 then investors are willing to pay 15$ for each dollar of earnings. Depending on what earnings are used in the calculation we have past (or trailing), current and future P/E ratio. The past P/E ratio use actual earnings for previous four quarters. The current P/E ratio is calculated actual earnings for the previous two quarters and the projected earnings for the the following two quarters. The future P/E ratio is entirely based on projected earnings for the next year. The price is current share price on the stock market.

High Price to earnings ratio of a company means that the market expect that the EPS of that stock will be increased. If the company doesn't meat that expectation, the price will go down. Low P/E ratio means that the market expect that the EPS is going down. If the company doesn't meat that expectation, price will go up. Such stocks are good opportunities for buying.

The P/E ratio below average for the appropriate industry, might be a buy signal. The market "thinks" that a company with a lower P/E ratio then its industry is less attractive than an average company in that industry. You should figure out whether the market is wrong or not. Also it is necessary to consider a long term trend. For example in 1982 the P/E ratio of the S&P500 index was about 7, while in 1999 it was about 34. As with other ratios, you should consider the other parameters of the company.