PHIL TOWN

What it Means When PEs and EPS Don't Add Up

Dave recently wrote to Phil Town and asked a good set of questions about PE ratios: 

"Why do some companies have a very high PE and low EPS or a low PE and high EPS? This raises a red flag to me when I see a company like US Steel (X $27.37) with a EPS of $18 and a PE of 1.5?"

Here's what it means:

A PE ratio is the stock price per share divided by the earnings per share.

Businesses are valuable to their owners because of the money they make (the earnings).  When an owner decides to set a price to sell the business, they take into consideration the money they are likely to make in the future if they kept the business. 

If it's a wonderful business (a.k.a. a "Rule #1 company"), the owner is quite certain to make money from the business for many years into the future.  For that reason, no owner of a wonderful business will sell it for just the earnings they were going to make in the next year. 

Owners insist on a price that reflects the certainty of the future earnings -- some multiple of today's earnings. 

Trading RIMM on Arrows and FACs

A few days ago Phil Town got this note from Chuck:

Thank you for the 43% gain thus far using Rule #1!  That said, I’m licking my wounds on my latest transaction. I purchased RIMM on 03/11 at 40.00/share based on a $42 MOS. I then got out on 2 reds on 03/25 at 41.71 following your advice on your blog regarding a stock that’s either moving sideways or going down.

Had I stayed in until 3 reds I would have caught the ride all the way up to 60.10 as the stock rose 7.61% today during trading hours and then another 22.43% after hours because of better than expected earnings.

With such a big run up in the last 2 days would you still get in or wait for a pull-back considering there are 3 greens? Any advice on how to trade on 2 versus 3 reds in the future?

Chuck is doing great with RIMM but had a question about when to get in (and out).  He's not stockpiling it, he's trading.  He had a MOS at $42.  Without comment on the MOS, let's look at the RIMM chart.