This is the Value Investor podcast with Tracy Rinek, all things value all the time. Welcome back value investors. So I've been getting some questions about PE ratios and how that mixes in with value investing to start the year here in 2021. Do PE ratios even matter anymore?
We know that growth is huge. It's still the dominant force. I don't care what everybody says that value is now back and everybody's rotating into it because they did at the end of 2020. No, let's be honest, growth is still where everybody is going.
They go into value for a little bit and then they get out and go back into growth. So does it matter what's going on with the PE ratios? If it's all about the growth, should value investors still be looking at the PE ratios? So remember, the PE ratio or price to earnings, that's what the PE stands for, has historically been the way to go to find value stacks.
Even way back with Benjamin Graham, he looked at PE ratios and then he also looked at PEG, which is the PE plus the growth component. So that's going back way back. That's almost 100 years now that people have been using PE ratios to buy value. And remember, you want the PE ratio to be as low as possible because you are trying to get the earnings for less.
You're trying to get the earnings on sale, essentially. So the lower the PE ratio is, the more the stock is on sale. And I have always looked at PE ratios as 15 and under for the most part for the show, although a couple of screens have it at 20. 20 and under would be cheap right now because the S&P 500 is something like 23, I think, 24 times.
And so anything under that is cheaper than the overall market. But I usually use 15 if I'm creating the screen on my own, or you could go even cheaper. A lot of people use 10 and try to get those single digit PEs, which are pretty rare, but that has a different component to it because there is usually a reason why stocks are cheap, right? So you got to keep that in mind too.
There may be something going on at the company with the business of the company that might not be so great, might not be something you want to own. Or it could be industry-wide that everyone on Wall Street is shunning a particular industry, like say for instance, the last couple of years, basically gold, the gold miners, all of that has been out of favor. So a lot of those could get low PEs because nobody wants to be in it. So you have to look around for that reason because there are reasons for the cheapness always.
But what if investors are just willing to pay more for stocks right now? So these higher PEs don't really matter. What if we are in a state of perpetually high PEs? That is a good question because we have been for several years, right?
After all, Amazon has always had a sky high PE. I went back to look to see in Zax data what the PE has looked like because I know I have talked about it in years past under his podcast when it has been at like 700 or 800 times. We all remember looking at it when it was like 1000 PE at some point. So I looked at our data and it traded as high as 1362 times in 2015.
So just six years ago, that is how expensive it was. It is now trading at 69 times and 11 year low. It is never had a value PE. I never saw anything where it was under 15.
I didn't even see anywhere it was under 20, but it was trading at 30 times in 2008 during the Great Recession and the big sell off that happened then. So it has traded more cheaply than it is now, but 69 times is actually, as I said, an 11 year low for the PE. So if you waited to buy Amazon based only on its PE, obviously you would never have bought it. You would still be waiting, right?
So I've talked in the past that the PE is not the only determination of value. That value investors can use the classic value fundamentals like the PE, price to sales, the peg, price to book, price to free cash flow. You can use all of these as screening tools for a pure value place because that's what that screens for. But what about value in an industry?
That's another way to find the value, especially among the hot growth stocks because you are basically looking for anything that's out of favor as a value investor and there's always something out of favor in every industry. They're always is. I don't know how hot it is. So take a look at something like the social media companies.
I looked at these to find out who is cheap, who even has a PE and what's going on with them. And obviously Facebook kind of jumps out at you, right? Because Facebook shares ticker FB are in the dog house. They had that FTC action that was brought in December 2020 again about legal monopolization.
And then there was the capital attack on January 6 and 2021 shares a fallen 10% to start the year. Now they have rebounded off the worst of that sell off, but they're still down about a percent or 2% here in mid January 2021. So I took a look at its PE and it's trading at 24 times right here. That's a two year low.
The last low was in 2019 when it traded at 21 times. It has traded even more cheaply in 2018. It traded at 17 times, 17.8 was the low. And that was when they had all those privacy issues.
Remember that? I know I did a whole show and I think that was the show where I did talk about how you can look for value among the fang stocks. And Facebook at the time did have like that 17 or 18 time valuation then. So it has traded cheaper, but at 24 times it's still the cheapest it's been in two years.
So then I took a look at some of its competitors just to see how they might compare and to see if that was really a value for the industry. So Pinterest ticker PINs as a negative PE. So they're not yet totally in the green on the earnings. Although they may get there here in 2021 depends on what happens in the first six months here.
But even if they were to get in the green, the PE is going to be quite enormous on that because the stock has had a huge run. And so the PE would be, the earnings are going to be very low even if they're in the green. So Pinterest is not really in the same game with the PE type of analysis. Snap also has the negative PE.
Twitter has a PE now. It is in the green on earnings trading at 98 times. So just give you a little comparison. 24 times for Facebook, 98 times for Twitter, ticker TWTR for Twitter.
And then I looked at Microsoft, which is huge company and owns many different divisions, but it does own LinkedIn. So I had included it because that is the social media component it owns by obviously small part of the rest of the company. But even Microsoft ticker MSFT is trading at 32 times. So this kind of analysis actually does show you that Facebook may be out of favor in its industry when you're comparing it with peers and what the street is willing to pay and other investors are willing to pay for those earnings.
They're willing not to pay for Facebook's earnings here at this level. So that's one way to look at it. As a value investor, you could be thinking, obviously, as I just said, that Wall Street is discounting Facebook's earnings. You could also apply those same analysis to various other industries.
I took a look at the semiconductors because they've been soaring. So you're thinking everything is really expensive there. I want semi, which is kind of like one of the big bellwethers in that industry is trading at 32 times ticker TSM. But I looked at Broadcom.
They're trading at 19.8 times. That's ticker AVGO. Yes, because these would be a Vago. So AVGO for Broadcom.
Micron ticker MU is at 23 times. Applied materials, AMAT is at 21 times. And then Intel, INTC is at 12.4 times. And we've talked about Intel on the show a bunch in 2020 because it continuously keeps showing up as one of the values tax because that PE is under 15.
Intel, we mostly know the issues that are going on there. They are having a new CEO come in. So this is a turnaround story once again for Intel. But that's why it's cheap because it does have some business issues and the market is basically judging it on that.
So keep that in mind when you're looking at that. So yes, you can do these kind of industry analysis. I took a little bit of a quick look at software. And I saw I was expecting everything to be super crazy expensive, but cognizant ticker CTSH is at 20 times earnings.
It's a ZX number two. Earnings expected to grow 9% here in 2021. They've been around forever. They're actually one of the top 30 stocks of the last 30 years in the S&P 500 cognizant CTSH, but trading at a cheaper valuation than some of their peers.
Now you can do the same thing I just did and look at industries by running a screen by sector, which is the broader based. It's going to give you like all of technology if you search under technology or by industry on ZX.com. You can run all these screens. And it's a good way to get an eye on what do valuations look like in a particular industry is the company I'm looking at to buy overvalued or undervalued compared to its peers.
And what do I want to pay for those earnings? So let's go back to the original question. Do PE ratios matter? Should you throw out the traditional value screen of a low PE under 15 right now during these market conditions?
I would say, why not try both methods? I just did. I, well, I at least gave you the method of the looking at the industry, looking at peers, and managed to find some value just by doing that. You could take a chance on some purely cheap companies and on some that are industry cheap.
There are no rules. I've said this many times. Nobody is telling you you can only have to follow the pure classical value metrics like a Benjamin Graham from over 100 years ago. Nobody is saying you have to do that.
So use this X rank to get those rising earnings estimates. Look for growth. You can run those classic value screens. I run it here all the time.
We just ran one to start 2021. If you recall, I came up with nine classic value stocks with the high ranks of ones or twos, and that had all the classic value metrics, the price of sales, the price of book, price of free cash flow. And I think peg was in there. It has it all.
It has every, every fundamental you could ever want. We did get nine stocks out of that screen. And remember, one of those was General Motors ticker GM. Now, GM has been in our screens for several years.
It's been a cheap stock for years, but suddenly here in 2021 Wall Street has decided it's time to buy in. So the shares have soared 35% to start the year. They're still cheap with the forward P of 8.6. The peg is still 0.87.
So it still has all the classic value fundamentals. So if things are expected to rise 23% in 2021, that's where you get the good sex rank, right? So you could have bought GM, excuse me, I don't want to confuse the two. You could have bought GM over all these years.
I've been talking about it. And that is what value investing is all about because it has been cheap this entire time. And it's we've literally just been waiting for Wall Street to recognize that there's some value in it. And I know many GM investors out there, I've seen you on the chat boards who are extremely loyal to the company, even after they cut the dividend last year.
So you weren't even getting that to hang around. You have stuck it out. And that is part of being a value investor as well. Value investors have to have the patience to wait for Wall Street to figure out what's really going on with that company that's priced so cheaply.
So kudos to all of you who have stuck it out for several years or for those who maybe listened to that podcast I did earlier in the month. And you decided, hey, I'm going to buy some of this because it is still dirt cheap. And I like the story and I'm going to get in here. Now, there's no guarantee, as I said, that you may not wait several years for things to turn around.
Energy stacks, those had the big sell off in the coronavirus sell off and they got a rebound right in March into April. Then they sold off again all the way into the end of October. They were testing those March lows again. And then we got the vaccine and then they've had, I would say two rallies here, but you basically had to stick it out for the last eight or nine months to really see, you know, quite a bit of return in some of those energy stacks.
And if you would own them before the sell off, if you're a longer term investor, you're still waiting to get back there. So that's what being a value investors all about. It's not getting the quick gains. It's always about getting the stack that's out of favor, getting the cheap company because everybody thinks it's done or it can't be turned around or it's just simply out of favor and it's industry like a Facebook is right now.
So value is about more than just the PE ratio. It's looking for those companies on sale. It's going against the grain. It's taking a stand and standing out there and understanding what the business is doing that you have bought.
So it's not easy, but the payoff can be great if you have the patience to stick it out. So keep that in mind. So does the PE ratio matter? Yes, it does.
We still want to get those earnings cheap or cheaper. That's the key. And right now, as I've just mentioned on this episode, there are some growth stocks where you can get the earnings cheaper than some others in their industry. So keep that in mind when you're looking around there for deals, right?
Okay. So let me recap all the tickers. We talked about a lot of tickers on this episode. So I want to put them all out there.
So we did talk about Amazon AMZN. I own it in my personal portfolio. Yes, I do buy growth stocks. Again, there's no rules Facebook.
I own that one. It's ticker FB Pinterest. I actually do own that one and I only bought it last year. P I N S.
It's also in my value investor portfolio here at SACS. We talked about SNAP. That's S N A P Twitter TWTR Microsoft MSFT. I do own Microsoft Taiwan, semi TSM, Broadcom AVGO, Micron, MU, Intel, INTC, Applied Materials, AT, Cognizant, CTS, H, and General Motors, GM.
So be sure to subscribe so you don't miss a single episode. I have a couple really good episodes coming up because I'm getting a lot of good questions and inquiries from all of you about what it means to be a value investor right now as growth stacks continue to soar. I know many of you are faltering out there. I feel it too.
I want to chase too. But there is a way value investors can find the cheap stacks and find good quality companies and hold those and still do well as an investor. So be sure to subscribe so you don't miss a single episode. I am a value investor is on Spotify.
We are on Apple Podcasts. We are trying to get on Amazon. So look for us over there. But if you don't find us get us on one of these other platforms or get us on SoundCloud with the Zax Market Edge, you can get two for one shows over there.
I just did an excellent one on the agriculture stocks on the Zax Market Edge that a lot of you value investors might find interesting because it's little of our alley there on agriculture. So get get us two for one on SoundCloud, search for Zax Market Edge and then subscribe over there. But be sure you get us somewhere and I'll see you again next week with some of our value stocks.