If a stock has a low p/e and high p/s(relative to its industry/sector)…what would you conclude?

[nik1]

I remember in 2019 when markets pundits started using p/s to value stocks because they couldn’t justify stocks going up with no earnings.

Obviously they were reaching as we look at the current market environment and how p/e came back in favor very quickly to justify why one stock goes up and another goes down (TV market pundits).

I don’t value a stock solely based on p/e or p/s but I like to use them for analysis, etc.

Any market sages or experienced participants been through these cycles? Can you give some context or thoughts on it.

Markets aside. I’m speaking to the disparity

Example
Stock A: fwd p/e 36 p/s 36

Stock B: fwd p/e 52 p/s 5

Based on these numbers what would you conclude about Stock A and Stock B?

 

[ladykay]

@nik1 It depends on the industry. High PE is normal for something sought after along with high PS ratio like tech for example. But by your example specifically I would conclude that stock B may be cheaper but why is unknown. I personally prefer ROIC and ROCE as long as it’s higher than the cost of capital (WACC).

If it makes you money I’ll share my search criteria

1. Gross margins must be 25% or greater no flexibility
2. If it pays dividends payout ratio must be

 

[nik1]

@ladykay Thank you very much. This is of value to me.

Question: why would a stock have the same p/e and p/s?

• Is it a multitude of factors like what you said about accounting/deferred rev/bookings etc.

-have you seen same p/e p/s stocks before? How did they play out if so.

 

[ladykay]

@nik1 Oh sorry man I misunderstood the question. No I’ve never seen a company have a high PS compared to forward PE but I’d usually stay away if the PS is trading way above its net income multiple. Sounds to me like the stock is getting a hype around it that people are pricing in a massive premium relative to its earnings. If this was a real company I’d look at their actual cash from operations, FCF and DCF the price to see if it’s overvalued. Otherwise I’d stay away. The market for some reason is overly bullish on the stock. For example amazon was trading with a PE of 60 with a PS of 15. That’s already a high multiple but if the PS is as high as the forward PE I would be sceptical of their prospects for growth and I would call it detached from the fundamentals. Please correct me if I got the jist of your question wrong

 

[nik1]

@ladykay I’ve come to the same conclusion. Very interesting to see what the numbers are trying to say.

 

[welshchild]

@nik1 Price to sales is just a metric used when companies don’t have meaningful earnings. I would use it only as a last resort.

 

[nik1]

@welshchild Right.

How many times have you seen that dynamic play out in the market though?

 

[patrice]

@nik1 Value or that the company is shit. Two options really.

 

[nik1]

@patrice What would you conclude about…

equal p/e and p/s?

High p/e low p/s?

 

[patrice]

@nik1 Higher PE than average means market thinks this company is an industry leader and this company should exceed expectations.

Lower PE than average means market thinks this company has problems. Be that bad, culture, bad management or bad products. They are expected to be worse than industry average.

Sometimes the market is wrong and you can find value buys. Basically what I'm saying is anything could happen.

 

[nik1]

@patrice True but that’s just factoring p/e from the question. I’m curious about what the relation between the two are trying to say in this thought experiment?

 

[davidsond29]

@nik1 It all has to do with profitability, more profit means better p/e. This is why NVDA looks insanely expensive compared to AMZN on a p/s basis. The former literally prints money with insane margins.

P/s is honestly most useful for small companies that are still not earning anything. It gives you a sense of valuation potential once they turn a profit.

A great p/e bad p/s company could also be a red flag because profitability is not always sustainable and it can only go up to a certain point. If you are losing money on a shit ton of revenue there are loads of levers you can pull to improve net income and thus p/e.

 

[harmonius]

@nik1 How can a company have the same p/e and p/s? That means e = s…

In general low PE high PS vs peers would just tell you it has higher margins vs its peers.

 

[nik1]

@harmonius NVDA has the same fwd p/e and p/s right now.

 

[god2good4me]

@nik1 It does not. Its P/E is 72 and P/S is 36. Makes sense as their Profit margin is 50%. You are probably looking at its forward P/E and current P/S. Once they hit future earnings, its P/S will be down 50% if the price remains the same.

 

[nik1]

@god2good4me Yes fwd. I mention fwd in the post. So I’m assuming fwd in all discussion.

 

[god2good4me]

@nik1 Why would you compare Trailing P/S with Forward P/E !!! They are not related. The fact that Nvidia's P/E is expected to go down dramatically shows that they are in hyper growth phase. Just open one of their earnings release to understand how good it is.

Generally companies with Low P/S means that they have very low profit margin. Nvidia is among those with crazy high margins.

 

[nik1]

@god2good4me I’m not comparing fwd p/e with ttm p/e.

I’m comparing fwd p/e with p/s.

There is an interesting relationship between the latter that I wanted to explore more, get some thoughtful discussion going, see if it lead somewhere.

 

[god2good4me]

@nik1 Forward P/E cannot be compared with trailing P/S. Forward P/E will driven by forward Sales. That for Nvidia is growing at a crazy pace and margins are also growing big times as the margins on their DC GPU are unprecedented. I am expecting their margins to cross 65% this year. So you cannot compare Nvidia to companies having low P/S. They are totally different companies.

 

[harmonius]

@nik1 If P/E = P/S, then basic algebra says that E=S. NVDA certainly does not have its net income equal to its revenue.