Paul just reading today's small cap report and you mention being wary of shares on a pe of 4 or below could you be kind enough to explain the logic behind this, i've heard top stock pickers like Mark Slater saying they generally don't buy stocks with a pe above 20 which I get but first time I have heard avoid below 4.
If you could also maybe let us know what other red flags we should look for when gauging a stock on the stockopedia individual stock reports that are easy spots would be appreciated,
Finally when are you going to write a book reckon it would be more suited to a life story and how rose, fell and rose again rather than a Naked Trader type how to book, seriously think it would be a great read and good seller.
Regards
Andy
Andy
I think the point Paul was getting at is that if there is a PE below 4 you must be wary because it would be abnormal for a company trading well to be on such a low PE. Paul made this comment in relation to Produce Investments (LON:PIL) in his report. If you look at the stock report now it says that the PE is 3.5 but go to the broker estimates further down and you can see there has been a massive adjustment putting it on a PE of 7. Produce Investments (LON:PIL) alos has a lot of debt which will need to be financed out of reduced earnings.
The other place you often find very low PEs is with overseas shares some (some have PE ratios of 1). There is a reason for this just look at the case of Naibu Global International Co (LON:NBU).
I dont think Paul is saying every stock on such a PE ratio should be avoided but just be wary and do your homework very carefully. The only time I can recall the market getting it really wrong was Trinity Mirror (LON:TNI) a few years back.
One of the red flags you should always be wary of is too much debt. You also have to think carefully about what headwinds could impact a company (such as changes in laws, regulations, increased competition, structural decline of an industry). Bulletin boards can be useful for quickly getting to grips with the issues facing a company but just be wary of the extreme bullish and bearish views.
Hope that helps
Ric
