A Reader Asks, "How important are Price-to-Earnings (P/E) ratios in evaluating turnaround stocks?"
Price-to-Earnings ratios are probably the most widely used tool for comparing the relative values of different stocks. However, they are often less significant for turnaround investors. One reason for this is the fact that many turnaround stocks don’t have any earnings to plug into the P/E ratio calculation because they have been losing money prior to the commencement of their turnaround. And even when a turnaround company has begun to show earnings, the level of those earnings may still be quite low, which leads to a misleadingly high P/E ratio. The one circumstance where I do find P/E ratios helpful is where a company has a very low P/E ratio compared to its peers. This may indicate that Wall Street may have given up on the company--depressing its stock price and increasing the gain potential.
(Question submitted by Wendy M.)
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In nearly every case, the shares of a company in bankruptcy become worthless. In very rare cases, however, they can become great investments. W.R. Grace (NYSE:GRA) shares produced a 75-fold return, as an example. With California utility PG&E (NYSE:PCG) now in bankruptcy, the range of possible outcomes for its equity is wide.
EV/EBITDA: What Is It & Why Are We Using It More?
In reading recent editions of The Turnaround Letter, you have probably noticed that we are increasingly using EV/EBITDA as a valuation measure, rather than the better-known price/earnings multiple. We thought it might be useful to describe this measure and why we like it.
Turnaround Letter Stock Pick Named Top Performer of 2017
What Last Year's Top Stock Pickers Are Buying in 2018
This Forbes write-up follows up on the recent Top Stock Tips report--naming The Turnaround Letter's Crocs recommendation the top performer of 2017: With 90% gains, CROX beat out 100 other investment ideas included in the report; and the stock continues to have value investing appeal, according to Putnam.
George notes, "We see additional upside for the stock in 2018 as management's efforts continue to bear fruit, though the gains will likely be more muted than we saw in 2017."
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