If you are investing or intend to invest in the shares, one question always intrigues you and that is “Why people like low PE stocks? There are so many facts and questing regarding the PE stocks that need to be dealt with. It is assumed that low PE is due top undervaluation, but then there is much more to this. The significance of undervaluation has to be ascertained. Interestingly, the fact remains the same that low PE shares yield better returns and therefore are favorite option for investors.
PE ratio is an indicator that cooments about the valuation of the stock, that is it is either cheap or costly to buy.
However, just relying completely on low PE for stock picking is not advisable. As low PE could also result due to bad fundamentals. Double-check the fundamentals before putting your stakes on any low PE shares. Here we need to understand the complete process of how the shares yield earning. The shares help to earn in the following ways.
1) Dividend earning
2) Price appreciation
A low PE stock which has string business fundamentals has immense potential that the prices will rise in future or the company may offer good dividends thus generate better yields.
Before investing in PE shares calculating the PE formula is crucial. There are two components of PE as described below.
It is the price per share at which the stock is available for trading. If the price is low it is due to undervaluation. Thus one should often look out for shares that have low price.
EPS OR Earning Per Share
Net profit and the number of shares outstanding in the market determine the EPS. The shares that have high net profits will have more EPS. Growing EPS indicates that the business has strong fundamentals. If the EPS is higher the PE will be lower.