How A Price-to-Earnings Ratio Moves the Market

Many times we have said how stocks respond to market news heavily and how certain types of press releases can validate the rise of stocks. To take this to the next step by using metrics to describe just how strong a stock responds to market news, we use the price-to-earnings ratio, also shown as P/E. P/E is derived from dividing the company’s share price by its EPS (earnings per share). The EPS is found by using it’s total net income over a given period and seeing how much could be given per share with a higher number representing a financially strong company. If a company has a high P/E ratio, they will respond heavily to market news, so if you know when a company has upcoming news, weeks out perhaps, you will know when to have some money stored to make a play. For example, Tesla ($TSLA) a company with an absurdly high P/E ratio (1,240.39) has what it calls “battery day” on September 22nd. Similar to Apple’s forum where it releases plans for the year and new devices, Tesla does the same. It is rumored that this year Tesla will announce their release of the million mile battery, to fully outpace itself from gasoline powered vehicles. A relatively low P/E ratio company is CBRE Group, sitting at 14.15, meaning a major press release, really won’t blast the price of this stock in either direction. However, as I have preached before, low expectations for a move could lead to major profit, so judge P/E ratio based on your own discretion.

-Darnel Shillingford

Leave a Reply

%d bloggers like this: