Ep 59: What is P/E Ratio and Stock Valuation?

Jess: Yes.

Jessie: How do you valuate, quote unquote, valuate a stock? As in, how do you tell if it is priced right? I know you said that a high price doesn't mean a stock is expensive.

Jess: So how do I tell if a stock is expensive then? And how do I know if a stock's price is what it should be? Like, if I'm buying it at the right time, make it make sense? Hmm.

Jessie: I did say that.

Jess: And that is because price alone does not really tell you if it's expensive or not.

Jessie: You've got to look at its potential relative to other things.

Jess: But we're definitely due for a stock analysis episode.

Jessie: But I think before we do that, since we bring up P-E ratios, we haven't done a deep dive into P-E ratios.

Jess: And Beza, one of my favorite listeners, everyone's my favorite, but she just asks all the questions and I answer every single one.

Jessie: I love it.

Jess: I know we've been going back and forth and I said I'd make you an episode.

Jessie: So this one's for you, Beza.

Jess: Thanks, Beza, because I've also been wanting a P-E ratio episode for quite a while.

Jessie: But this is important.

Jess: If you understand this component really, really well, it sets you up for future success when you get into stock picking and even picking ETFs as well, because we can look at it all together in sectors.

Jessie: But it helps you understand if something is overvalued, undervalued, expensive or cheap, you need to be able to spot it and you need to spot the stock's potential.

Jess: And more importantly, what the market thinks its potential is.

Jessie: The market's its own organism.

Jess: Yes, it is.

Jessie: So I'm going to learn how to numerically see a stock's potential then? Yeah, that's right.

Jess: Here we go.

Jessie: You're listening to Market MakeHer, the self-directed investing education podcast on a mission to make you an informed, self-directed investor.

Jess: We break down how the stock market works from her perspective.

Jessie: That's us.

Jess: We're her.

Jessie: But all genders and non-binary folks are welcome here.

Jess: Jess and I are here to demystify the world of investing for you, teacher-learner style.

Jessie: All of our episodes are in three categories.

Jess: We have educate and explain.

Jessie: We explain how things work to make it make sense.

Jess: We call this your foundation.

Jessie: We want a strong foundation.

Jess: Then two, apply and put it to work.

Jessie: This is where we move from education to edu-action.

Jess: We literally show you what buttons to click on your brokerage firm and explain it all along the way.

Jessie: And three, we keep it current where we talk about what's happening in the market, why it matters and how it could impact your portfolio.

Jess: We also do that on our new newsletter and our new AI episode.

Jessie: Check it out.

Jess: Today, we are educating and explaining.

Jessie: So we're your hosts.

Jess: I'm Jessie Dinwi.

Jessie: My job is to ask questions, remain curious and make sure there is no financial jargon.

Jess: And I'm Jess Inskip.

Jessie: I act as the teacher or finance expert, as we like to call it.

Jess: I have a hard time calling myself an expert.

Jessie: I don't know why, but I've worked in finance for 15 years.

Jess: Provide market commentary on CNBC, Fox Business, Yahoo Finance and the Schwab Network, TikTok, everywhere.

Jessie: Yeah.

Jess: You're all over the place.

Jessie: All the places.

Jess: And we're joined again by Darling Lady Darla, which is my dog.

Jessie: All right.

Jess: PE ratios.

Jessie: I'm so excited for this one.

Jess: Me too.

Jessie: I still don't understand them.

Jess: I keep trying to figure it out.

Jessie: And I think I need to know a deep dive, rabbit hole level of info to finally understand it.

Jess: And I'm sure that's what's going to happen today.

Jessie: That is exactly what's going to happen.

Jess: All right.

Jessie: Let's talk about what a stock price is first before we do that.

Jess: I think that's the foundation.

Jessie: So we know that when a company wants to go public, they split their company up into a bunch of tiny little pieces and then that becomes the stock price.

Jess: So if you take the stock price times the tiny little pieces or the shares outstanding, that's the company's market capitalization, right? Mm-hmm.

Jessie: Tracking so far.

Jess: How do we know if that whole value is actually worth what the company should be worth? Let's say you have a company and for simplistic terms is worth a hundred thousand dollars.

Jessie: How is it worth a hundred thousand dollars? That's the question we're asking and answering with PE ratio because PE ratio is just the price divided by earnings.

Jess: That's the math.

Jessie: Oh, price divided by earnings.

Jess: PE.

Jessie: Got it.

Jess: Okay.

Jessie: Yes.

Jess: And so it may sound intimidating.

Jessie: It's a fundamental piece, like literally fundamental analysis.

Jess: Everything's in the name.

Jessie: $10,000 a month.

Jess: So $120,000 a year.

Jessie: Is your company worth $120,000? That's just its earnings.

Jess: What's its growth potential? Where do you evaluate that? So we may say something is trading and we'll bring this all back together as well, but I will say this very often and be like, Apple's trading at 30 times next year's earnings.

Jessie: That is normal or that's too high.

Jess: How do we figure that out? That's the PE ratio that we're referencing.

Jessie: So if stock price is $100 and it's earning $10 per share, again, simple math, the PE ratio would be 10.

Jess: It's trading.

Jessie: Hold on.

Jess: So PE ratio, price to earnings, when we say price, we're talking about the price of a share of a stock.

Jessie: That's right.

Jess: Okay.

Jessie: And then earnings is earnings of the whole company.

Jess: That's right.

Jessie: And then is there quarterly earnings or yearly earnings? What are we looking at? We would look at annually.

Jess: Annually.

Jessie: Okay.

Jess: So what's their annual? And there's two ways.

Jessie: And this is the way you'll see it on your brokerage firm.

Jess: You might see something that says TTM.

Jessie: That means trailing 12 months.

Jess: So that's in the past.

Jessie: And then you might see FY with a number.

Jess: That means forward year 2025 or forward year 2026.

Jessie: That's why I say with a number.

Jess: And I want to see it with a number.

Jessie: Otherwise, I would say fiscal year, which would be looking backwards.

Jess: Okay.

Jessie: So if it's FY with a number, that's forward year, like looking a year in advance? That's right.

Jess: So that's its potential, which is the more important one.

Jessie: I look at that one and it's honestly a little bit harder to find on your brokerage firm.

Jess: So I want to make sure that you know what you're looking for.

Jessie: So if it says FY 2025, then it would show a number for earnings potential for 2025? Is that what that is? Yeah.

Jess: Because analysts will say, I expect Apple to make XYZ per share next year.

Jessie: Okay.

Jess: That's its earnings potential.

Jessie: But how do you compare that with something else? It's not just, oh, okay.

Jess: Apple is expected to make $5 per share and its competitor, I guess Google would be in a way.

Jessie: So Apple has projected forward year earnings of $5 per share.

Jess: This is hypothetical, not real.

Jessie: And Google had projected earnings of $6 per share.

Jess: But if Google's trading relatively, it could, even though it has more earnings, Apple might be better priced.

Jessie: Do you see what I mean? So that's what we're going to look at all together.

Jess: And I'm still going to break that down further.

Jessie: Yeah.

Jess: Because EPS is earnings per share.

Jessie: And I'm just realizing now that when we say earnings per share, is that the stock price or is that something else? That is saying for one share of stock that you own, you should expect this much of earnings.

Jess: How much you can potentially make off of that share in how long of a year? Well, it depends on which PE ratio you're looking at, actually.

Jessie: And what earnings you're looking at.

Jess: So when you look at earnings, they're reported quarterly.

Jessie: We're in report card season now, so earnings season.

Jess: That earnings per share would be a quarterly number.

Jessie: So when you look at it all together for the last four quarters, that's how much the potential earnings or the actual earnings for the last year.

Jess: Going forward, you would say this is how much per share I'm expected to earn.

Jessie: That's its growth potential.

Jess: Okay.

Jessie: Based on like forecasted sales, people say, oh, we've got a lot of pre-orders for iPhones.

Jess: We have this new AI software that we released.

Jessie: And then that's going to have this next iteration.

Jess: We're going to have a cool AI phone and Siri is going to blow your mind.

Jessie: People are going to buy more iPhones.

Jess: So that's expected to have better earnings that quarter when that comes out.

Jessie: See what I mean? So like say the stock price of Apple went down and we know that Apple is like always going to have a new iPhone coming out.

Jess: So we know the stock is like maybe down in September, October when it's like, you know, those are the worst performing months of the year for the stock market.

Jessie: We can look at the PE ratio and earnings and all of that and like the forward year projected earnings to determine like, hey, the stock price is down now, but I know that it's going to go up next year based on their earnings potential.

Jess: So I'm going to go ahead and buy some more while it's like, quote unquote, on sale type thing.

Jessie: Is that how we kind of...

Jess: But you need to understand if it's on sale, that quote unquote on sale.

Jessie: That's what this is going to help us do.

Jess: This is the purpose of the PE ratio.

Jessie: Because think about this, the price constantly changes because of buying and selling.

Jess: Right.

Jessie: And the reason why it does is, is because as new information comes into the market, the market's trying to say, how much is this stock worth? How much is this company worth? And that's based off of buyers and sellers.

Jess: More buyers if they think that there's more future profit potential.

Jessie: More sellers if they think that it's not worth it.

Jess: Yeah, that's what's happening.

Jessie: Earnings estimates, there are a bunch of analysts.

Jess: Sometimes there'll be 100 analysts covering one stock.

Jessie: And they're constantly adjusting that.

Jess: So like today, an analyst increased their price target for NVIDIA, which increased the earnings potential, the earnings estimates for NVIDIA, which means the PE ratio also adjusted.

Jessie: The price adjusts, the earnings adjust, the PE ratio adjust.

Jess: Because it's the components of the math equation.

Jessie: Tracking so far, or at least clearer mud.

Jess: I'm here for clearer mud, not crystal clear just yet.

Jessie: Yeah, yeah, yeah.

Jess: Okay.

Jessie: Now think about this.

Jess: You don't know what a company is worth.

Jessie: You know what a company makes.

Jess: And when you're trying to understand what a company makes, let's say that, so if we were going to sell our company, we would have to say, how much is it worth to sell the company? It's not our earnings in a year.

Jessie: Absolutely not.

Jess: It's worth more than that.

Jessie: And so you'd multiply it by something.

Jess: If it's a high growth company like Apple or NVIDIA, technology stocks are on growth.

Jessie: You would multiply it by something like 30.

Jess: So your earnings by 30 gives you just what your company would be worth if it was for sale right now.

Jessie: Does that make sense? Multiply it by something higher if it has higher growth potential.

Jess: Where did the 30 number come from? Usually the average for technology is a 30.

Jessie: So we'll bring it back.

Jess: Your P.E.

Jessie: ratio might be 30.

Jess: It might be 10.

Jessie: It might be 12.

Jess: A higher P.E.

Jessie: ratio means higher earnings potential as in the market expects higher earnings potential.

Jess: So meeting, think about like Apple has around 30.

Jessie: I know it's around 30 right now.

Jess: I don't have the exact math in front of me.

Jessie: But if it's a higher price divided by a lower earnings potential, then that means it's a higher multiple.

Jess: Does that make sense? Like the way the math works.

Jessie: And I feel like I need an actual example for this.

Jess: Yeah, I think we need an actual example.

Jessie: Right.

Jess: You've got $100 is the price of your stock.

Jessie: If your earnings is 10, 100 divided by 10 is 10.

Jess: Yes.

Jessie: So that's that means that's your P.E.

Jess: ratio is 10 right there.

Jessie: That's all it is.

Jess: Literally price divided by earnings.

Jessie: OK, so 100 would be the price like saying that the price of a share of a stock for whatever XYZ company is $100 right now.

Jess: And then the earnings.

Jessie: Why is the earnings only $10? That's would be what that's its earnings potential that analysts expect or that's looking at the past 12 months.

Jess: So that's just the number that I grabbed.

Jessie: But why would it be low? So they're saying if the price of the share is 100, but the earnings is only going to be 10 per share, is that like 10 extra dollars? That means that in the past four quarters, it's made $10 per share.

Jess: That's what it's reported.

Jessie: OK, so like if I bought if I bought this share four quarters ago, it was like $40 cheaper.

Jess: Basically, it's it should have been, but it always trades.

Jessie: It's always forward looking.

Jess: So it's always thinking ahead.

Jessie: I remember the market is always thinking ahead.

Jess: And that's why where this terms pull forward earnings means, as we think, really, and people are concerned with that with A.I.

Jessie: Are they pulling forward these earnings that that are too far out that we haven't seen yet? But yeah, like how much more are they able to innovate? This is why price changes all the time.

Jess: This is why the stock market's moving constantly.

Jessie: Is that right? Yeah.

Jess: That concept.

Jessie: You have two stocks that are both $100 per share.

Jess: One is making $10 per share.

Jessie: The other is making $20 per share.

Jess: The one making $10 per share has a P.E.

Jessie: ratio of 10.

Jess: And then the one that's making $20 per share has a P.E.

Jessie: ratio of five.

Jess: The lower P.E.

Jessie: ratio, even though the same price, the five the five P.E.

Jess: ratio is considered cheap in comparison to the one at 10.

Jessie: And it's cheap because it means you're going to make more off that.

Jess: Like you're basically buying the stock now at a better rate because it's got potential to make you more money.

Jessie: Yeah.

Jess: And so you wouldn't look at it alone.

Jessie: But if you were saying both of these stocks are $100, which one is better in price or they're identical? Well, the one with the lower P.E.

Jess: ratio is going to be.

Jessie: OK.

Jess: And that should make sense, right? As a bigger divisor of earnings.

Jessie: So lower is always better for P.E.

Jess: ratios.

Jessie: But you want to look at it relative to something else and not alone.

Jess: So the whole market has a P.E.

Jessie: ratio.

Jess: Oh, the whole stock market, whole stock market, S&P 500.

Jessie: Each sector does and each stock does.

Jess: You can.

Jessie: Oh, because you could add up all the earnings per share on the S&P 500, weight it market cap wise and get a P.E.

Jess: ratio.

Jessie: Oh, that makes sense.

Jess: And so when you're saying the S&P 500 has a P.E.

Jessie: ratio, does that mean like S&P 500 index? That's right.

Jess: ETFs.

Jessie: OK.

Jess: That's right.

Jessie: And so S-P-Y-V-O-O, they have.

Jess: So ETFs also have.

Jessie: Absolutely.

Jess: P.E.

Jessie: ratios.

Jess: OK.

Jessie: So first of all, I never look at trailing 12 months.

Jess: Oh, you don't? Yeah, that's in the past.

Jessie: I don't care.

Jess: I care about their future.

Jessie: Yeah.

Jess: What's their potential? What is their potential? And normally the past is going to be super high.

Jessie: In comparison to the future.

Jess: Is it because when we're looking at projected earnings, the analysts like try not to project too high, like overvalue it? Sometimes, yeah, because companies beat earnings a lot.

Jessie: Yeah, a lot.

Jess: And maybe analysts don't want to be wrong.

Jessie: I don't know.

Jess: It's like not setting the goal.

Jessie: Like any company I've worked at, they've had their annual goals, right? What's the annual goal? And then how is the marketing department going to tie into that goal and help bring that X amount of revenue for the bigger goal of the company? Absolutely.

Jess: So every company has that.

Jessie: It's like the same when we go back to those SMART goals.

Jess: I'm doing SMART goals for myself for the year, for whatever job I have.

Jessie: You want it to be measurable, achievable.

Jess: Like you don't want it to be too high because then if you don't reach it, your review is going to be bad.

Jessie: So I'm sure that's like part of the methodology.

Jess: That is of coming up with what the earnings are and the earnings potential.

Jessie: So that's why I want to look at forward year.

Jess: I could look at and see if you hit or missed earnings to understand if that if you met your goals, whereas past P.E.

Jessie: ratio is not going to tell me that.

Jess: I would rather know if you met your goals or exceeded them.

Jessie: And then I'll look at your P.E.

Jess: ratio for the forward year.

Jessie: And then I would compare it to the market.

Jess: I compare it to the sector because of growth potential.

Jessie: Tech stocks are going to have a higher P.E.

Jess: ratio.

Jessie: Okay.

Jess: And that makes sense because they have higher growth potential.

Jessie: They have like less overhead and like potential for more margin, right? They do.

Jess: They do.

Jessie: Absolutely.

Jess: That makes sense.

Jessie: Can we pull up one and you like? Yeah, I'm actually going to.

Jess: I am going to pull some.

Jessie: Let's do the S&P 500.

Jess: SPY is that would be the same as well.

Jessie: But just the S&P 500, the index SPY is an ETF that is a solution for you to buy that index because you can't buy them directly.

Jess: How do you just look at S&P 500? I'm pulling this one up on CNBC.com.

Jessie: We've done that before.

Jess: Apple is trading at 32 times next year's earnings.

Jessie: And the technology sector is trading at 33 times next year's earnings.

Jess: So really, Apple is underpriced in comparison to the technology sector.

Jessie: What was Apple's again? 32.

Jess: 32.

Jessie: And then S&P 500 was? Is 28.

Jess: 28.

Jessie: Yep.

Jess: So I would want to look at the overall market.

Jessie: What is it in comparison to the market? What is it in comparison to its sector as well? Because if you look at anything technology wise, it's going to have a higher P.E.

Jess: ratio than the market usually because technology tends to have higher P.E.

Jessie: ratios because they have higher growth potential.

Jess: So its sector, even its industry, if you want to drill down, but that's one piece of the puzzle.

Jessie: Do not ever look at this alone.

Jess: If you understand this component, I remember when I first started understanding P.E.

Jessie: ratios, it's like you unlock another level of the matrix.

Jess: Stay with us.

Jessie: We'll be right back.

Jess: Ready to plug into the future? Join myself, Sean Leahy.

Jessie: And me, Andrew Maynard.

Jess: On Modem Futura, where we explore the technologies shaping our futures.

Jessie: We bring the experts, the insights, and a whole lot of curiosity to every episode of Modem Futura as we boldly go where no one else has gone.

Jess: So join us as we navigate the intersection of innovation and humanity, uncovering the stories that will define our collective futures.

Jessie: Subscribe to Modem Futura wherever you get your podcasts.

Jess: We'll see you there.

Jessie: See you then.

Jess: So you can compare a stock to a sector and the S&P 500, but like a stock is still, even if the stock is like the stock P.E.

Jessie: ratio is better, it's still more volatile to have a stock than an ETF or a sector ETF, right? So like, how do you kind of factor that in as well? Like this is a good stock to buy because compared to its sector and the S&P 500, it's like a good value.

Jess: And that can change, of course.

Jessie: And that's why we do our quarterly check-ins in our portfolio because we'd want to see like if the P.E.

Jess: ratio changed again on that stock.

Jessie: You could.

Jess: So I would look at it when I'm thinking of selling.

Jessie: I would look at it when I'm more so when I'm thinking of buying because I'm trying to see if it's underpriced or overpriced.

Jess: That's the value of a P.E.

Jessie: ratio, but it changes.

Jess: And you're saying right now Apple is underpriced because we're comparing it to the sector and to the S&P 500 and it's got a better P.E.

Jessie: ratio.

Jess: It's got a lower P.E.

Jessie: ratio ever so slightly than the technology sector.

Jess: So really it's in line.

Jessie: It's slightly underpriced.

Jess: And it's like we were saying, like, you know, it might dip, dip a little bit, but like I think the new iPhone's coming out soon, isn't it? It is.

Jessie: But now think about this.

Jess: When you're thinking about a company like Nvidia, which is on everyone's lips and has the super high growth potential, analysts keep calling their earnings wrong.

Jessie: So if you have this investment thesis and you look at the price to earnings ratio, now that you understand it, you say, oh, I think this is a little high.

Jess: Then you have to ask yourself, is earnings potential correct? So if you think, not advice, but just information here, for example, you think Nvidia has more earnings potential because you've done your research, you've looked at the company's earnings calls and you've looked at the transcripts or wherever you've done it, you think ChatGPT's newest release of Canvas is amazing and you saw that X is creating this whole new data center and they use Blackwell chips and you know that's Nvidia, say, I don't think those earnings are priced in well.

Jessie: Well, when Nvidia releases earnings and then analysts increase earnings, they lower the PE ratio because there is a bigger earnings potential that pulls it down.

Jess: That's why it's important to know the math.

Jessie: So this is the price of the stock right now.

Jess: This is the earnings per share, expected or past, whichever one you're looking at, but please look at expected.

Jessie: If you think that earnings per share is not right, then you think that the PE ratio is wrong.

Jess: But if you understand why you think it's wrong, you'll know that it's going to go lower.

Jessie: And lower in this case means higher, underpriced relative to its earnings potential.

Jess: We've said in the past, if you don't want to do all the work, look at the analyst ratings.

Jessie: But if the analysts are over-projecting or over-evaluating, I guess, Nvidia, for example, and then we don't trust the analyst ratings anymore, that means we have to trust ourselves and know how to do this for ourselves because that's kind of been the easy out this whole time.

Jess: You don't have to know all this.

Jessie: You can just look at the analyst rating and it may just be in certain cases like Nvidia because of all the growth that's recently had, like how the stock price exploded and they had to do a stock split and all of that.

Jess: So it's kind of maybe a unique case scenario, but and that's like we always say, do your homework, pay attention to what the company's actually doing.

Jessie: You want to know what the company's doing and like we've said before, how's their management, what are their profit margins, like all that stuff before you just kind of go into buying a bunch of shares of something based off of like hearsay.

Jess: That's so true.

Jessie: You want to look at, you could look at the same thing that analysts look at and you can also look at their opinion too.

Jess: Look at it all.

Jessie: I definitely do.

Jess: You could see Apple right now, they have 48 buy ratings.

Jessie: There is the analyst targets.

Jess: Oh, 48 analysts are saying like buy as opposed to sell or hold.

Jessie: Okay, right.

Jess: Only 12 are saying hold and one is saying underperform.

Jessie: Zero are saying sell.

Jess: Oh, I have their average price target.

Jessie: You could pull all of that.

Jess: So there's a lot of analysts and they have difference because they have different methodologies and that's okay.

Jessie: I want every perspective.

Jess: So that's one piece of the puzzle.

Jessie: Then if you have a good brokerage firm, you could look at analyst rating history.

Jess: You could literally see on a chart where they put the price target and if they were right or not, that will help you understand like, Oh, yeah, true.

Jessie: And Fidelity has something called the equity summary score where they give you a score of a company on a scale of one to 10, which is weighted based on the analyst that has the more accurate price targets has a higher weight in their score mechanism of that.

Jess: So there are solutions to the problem that you are saying and that's where it goes into choosing your brokerage firm.

Jessie: I think this is such an important metric.

Jess: So PE ratio, your literal definition is what is the price of the stock? What is the earnings per share? You divide that out.

Jessie: So price divided by earnings at $100 stock price divided by $10 per share earnings potential and the 10 PE ratio.

Jess: That means for every dollar that you spend, that's how much earnings potential you should have.

Jessie: Does that make sense? Like, yeah, investors are willing to spend $10 for $1 worth of earnings.

Jess: Okay, so can you say like, like 10 is a good PE ratio? Or is it always going to be relative on like what it is? So this is where there is definitely some varying opinions.

Jessie: I'm going to give you what people say.

Jess: Yeah.

Jessie: And my thoughts.

Jess: Okay.

Jessie: So the S&P 500 has an average PE ratio, normally around, I want to say 20.

Jess: So they'll say that's what they compare it to is the S&P 500.

Jessie: And the S&P is overvalued or undervalued based on that.

Jess: Normally, that's going back 10 years, say for the last 10 years, the S&P 500 has traded at 20 times next year's earnings right now is trading at 30 times next year's earnings, the S&P 500 is priced too high based on its earnings potential.

Jessie: And they're basing it off of the last 10 years, I argue that you have to consider other environments, the S&P 500 has not been dominated by technology, the last 10 years, it was industrials.

Jess: And that just doesn't make sense.

Jessie: Now technology has higher growth potential has higher PE ratios, we know that so the S&P 500 is not the same S&P 500 that it was 10 years ago.

Jess: And we're also not in the same interest rate environment.

Jessie: Things are different.

Jess: So I say, do not follow that method.

Jessie: And that's my reasoning.

Jess: I prefer comparing it to the sector as well as the S&P 500.

Jessie: Sure, that's fine.

Jess: But that's just one piece of the puzzle.

Jessie: So that that's a piece of just comparing just PE ratios.

Jess: But you also have to look at our profit margins expanding.

Jessie: So are they making efforts to reduce their expenses and increase their revenue? And what's that trend look like? And you can just pull that on a little chart.

Jess: You can see earnings is going up.

Jessie: Okay, cool.

Jess: Are they consistently beating earnings? Well, that okay, this is PE ratio is 30.

Jessie: And that's normal for the tech sector.

Jess: But if they're consistently beating earnings, analysts aren't pricing this very well.

Jessie: I still think this is undervalued.

Jess: That makes sense.

Jessie: When would you think it was overvalued if analysts are over projecting earnings too much? And you're thinking like, they're overvaluing it, so it might not make as many earnings per share as they're saying it will? Yeah, super high PE ratio.

Jess: Super, super high PE ratio is first indication or signal of something being overvalued.

Jessie: To double check that you can look at the past earnings each quarter.

Jess: Did they miss it? By how much? Okay, analysts are over anticipating earnings.

Jessie: And then this is why we say it's the market's perception.

Jess: So analysts are going to set the earnings piece, the market sets the price piece.

Jessie: So GameStop, for example, would have been trading at a super high PE ratio because the market bid up the price.

Jess: There was a lot of buys to make the price go up to an extremely high price that made zero cents.

Jessie: You look at that to the earnings potential and a high number makes the divisor go up.

Jess: Or a high number will make the, what's the correct math word, the answer to the equation.

Jessie: Does that make sense? So people do that with Tesla all the time because they think it has huge earnings potential.

Jess: People buy a ton of Tesla.

Jessie: Tesla shoots up a high beta stock.

Jess: You're saying, how do I compare it to something that moves more than the market? Yeah.

Jessie: So if it's moving more than the market, then the market might be overpricing it.

Jess: And then so the Tesla stock would say it has a beta of two or something.

Jessie: So the market has a beta of one, as you know.

Jess: Do you want to explain beta while I bring up Tesla? Yes.

Jessie: So market has a beta of one, the market being like the S&P 500 as a beta of one.

Jess: And that's basically like a measure of volatility.

Jessie: Like if something has a beta higher than one, that means it has more potential to move up and down too much or more than the market would.

Jess: So if the market's like a steady beta of one because it performs a certain way over time, and then a stock has a beta of like two or three, that means it's got more potential to move up and beat the market higher.

Jessie: It also has potential of like going below the market beta and you losing money, right? Exactly.

Jess: So the S&P 500 is a beta of one.

Jessie: That's the benchmark.

Jess: Tesla has a beta of 2.29.

Jessie: So that means if the S&P 500 is up $1, Tesla would be up $2.29.

Jess: It moves more, but it also, like you said, moves down more.

Jessie: Yeah.

Jess: And it has, right? It has gone a lot.

Jessie: It's very volatile, which is that's like a measure of how much it moves, volatility.

Jess: And that's going in again to like knowing the company, knowing what Elon Musk is doing now or getting up to or what interesting decisions he's making lately, what he's buying, what he's doing.

Jessie: Yeah, his tweets.

Jess: So that's why it's so volatile.

Jessie: His yeets.

Jess: I really think we should just call them yeets.

Jessie: I don't know why I love that.

Jess: But Tesla's forward P.E.

Jessie: ratio is 88.

Jess: Oh, okay.

Jessie: Yeah.

Jess: Because it's high relative compared to its earnings.

Jessie: It's a heavily traded security, but its past P.E.

Jess: ratio is 62.

Jessie: So it's still at a higher P.E.

Jess: ratio than it has been.

Jessie: What's the highest P.E.

Jess: ratio you've ever seen? I've seen Tesla in the hundreds.

Jessie: It would be Tesla.

Jess: Okay.

Jessie: Definitely Tesla.

Jess: NVIDIA has been high too.

Jessie: But then you have to remember, I've seen NVIDIA high.

Jess: And this is early on, on the A.I.

Jessie: narrative, where I was like, the earnings are just too low.

Jess: You need a bigger divisor.

Jessie: So that's where you have to put on your thinking cap.

Jess: If you're going to be a stock picker, that is part of being a stock picker.

Jessie: Yeah, it really is.

Jess: Otherwise, go passive.

Jessie: But this podcast goes beyond passive investing.

Jess: And remember, you know, the ideal kind of goal is to have 10,000 in a passive security S&P 500 index.

Jessie: And then after that, you can start picking stocks if you so choose.

Jess: But also diversify with bonds and treasuries and things like we talked about in the last episode or two episodes ago.

Jessie: Yeah.

Jess: Okay.

Jessie: We just want to make sure that you know exactly what to look for.

Jess: Yeah.

Jessie: And know your tools and resources.

Jess: So is the lowest P.E.

Jessie: ratio one? Does that ever happen? I guess it could be.

Jess: Yeah.

Jessie: Yeah.

Jess: I guess you really can't say like, oh, 20 is a good P.E.

Jessie: ratio because that's what people say based off of the S&P 500 because it just depends on are you looking at an ETF? Are you looking at a stock? What are you looking at? And compare it to the sector and what all is going on in the world, in the company with interest rates.

Jess: Like that's why you really do have to pay attention to everything.

Jessie: If you're a self-directed investor, you kind of need to know what's going on.

Jess: And if you're having a hard time paying attention to everything, you can follow us.

Jessie: You can sign up for our newsletter where Jess gives you a very detailed exclamation of exactly everything going on in the world of investing.

Jess: I took it way too far.

Jessie: We're going to send out a survey so you guys can tell us if you like it or not.

Jess: Also, you might have noticed we launched an episode that is using AI as a podcast to basically talk about what was in the newsletter.

Jessie: So you can get it two ways.

Jess: You can listen to our newsletter with our new AI podcast co-host or you can read it at your leisure.

Jessie: And if you have questions, please feel free to ask.

Jess: We will probably send out a poll to see if it's too much, if it's too often, what y'all are looking for because we don't want you to unsubscribe.

Jessie: We want to give you what you want.

Jess: Well, if you enjoyed this episode, please share it with a friend or family.

Jessie: We show up for you.

Jess: Literally, it helps us grow.

Jessie: If you're on Spotify, it's easy.

Jess: You can just click the five stars.

Jessie: You don't even have to write anything.

Jess: If you're on Apple, if you want to write a little something that would help.

Jessie: And anywhere else, we're on YouTube, all the places, social channels, follow us.

Jess: We'll leave all the links in the show notes as usual.

Jessie: And remember, when you build knowledge, you break down barriers.

Jess: That's right.

Jessie: Remember, investing involves risk.

Jess: There is always potential to lose money when investing in securities.

Jessie: Market MakeHer provides educational content and resources for informational purposes only.

Jess: We are not registered financial advisors and do not provide personalized investment advice.

Jessie: Any information provided by Market MakeHer on our website or podcast is not intended to be a substitute for professional financial advice.

Jess: Market MakeHer is not liable for any investment decisions made based on our content..