Winnipeg Free Press - PRINT EDITION

Sharing some wisdom on the value of stocks

  • Print

Many investors don't understand the stock market. I remember a friend, a financial editor at a big newspaper, telling me a stock was expensive because it cost $300. That makes no sense; the expensiveness or cheapness of a stock has nothing to do with its absolute price. It's the value of the stock (or the company, since a share is quite literally a fractional ownership in the company) compared to how much money that company can make and whether those earnings are going up or down.

If a stock costs $300 and there's one share, the company is worth $300. If another share costs $1, but there are a million shares, it's worth $1 million. Which is more expensive? The answer is you don't know, because you don't know how much each company makes.

We measure the value of a stock not by its price but by its price-to-earnings multiple. It's the most important thing to understand about stocks. When the PE multiple of stocks is high, stocks are expensive. When it's low, they're cheap.

Multiples go up and down. Investors might be willing to pay 10 times earnings for Royal Bank today, and if it's earning $5 a share, the stock will trade for $50. If tomorrow, investors decide a better valuation is eight times, well that stock is now worth $40. If, on the other hand, the multiple goes to 11, the stock goes up.

The best-case scenario for investors is when both earnings and multiples go up: it's like a turbocharger for your car.

That rare but blessed confluence is not likely going to happen any time soon, but there are reasons to think multiples in general will go up.

Here are four, courtesy of strategist George Vasic at UBS, a global investment bank:

1) Europe's troubles scared investors last year; although far from solved, the situation there is more stable. That might give investors the confidence to revalue shares. For what it's worth, the UBS global-risk indicator is rising and now in neutral territory.

2) Economic growth surprises are proliferating, suggesting investors have become too skeptical. This usually leads to higher multiples.

3) In recent history, every time the PE multiple has fallen by two points or more in a year, it has rebounded the following year.

4) Earnings rose 22 per cent in 2011, but growth is showing signs of slowing in 2012. This is good news, according to the strategist, because "PE changes are negatively correlated to growth, so this also would point to higher multiples in 2012," he said in a note.

To this I would add, thanks to Ben Bernanke, the U.S. central banker, interest rates aren't going anywhere for three years.

It's important to understand small gains in the ratio can produce big gains in the stock market. The S&P/TSX composite index is currently trading at 12.2 times estimated earnings, or a lot lower than its average of 14.5 times. But if the multiple rises modestly by just half a point, the composite index should rise to Vasic's target of 14,000 -- or 12 per cent above its current level. So for a half-point you get 12 points, to make it really simple. Not bad.


Fabrice Taylor is an award-winning financial journalist and analyst and author of the President's Club Investment Letter. Email him at:

Republished from the Winnipeg Free Press print edition January 28, 2012 B8

Fact Check

Fact Check

Have you found an error, or know of something we’ve missed in one of our stories?
Please use the form below and let us know.

* Required
  • Please post the headline of the story or the title of the video with the error.

  • Please post exactly what was wrong with the story.

  • Please indicate your source for the correct information.

  • Yes


  • This will only be used to contact you if we have a question about your submission, it will not be used to identify you or be published.

  • Cancel

Having problems with the form?

Contact Us Directly
  • Print

You can comment on most stories on You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

You can comment on most stories on You can also agree or disagree with other comments. All you need to do is be a Winnipeg Free Press print or e-edition subscriber to join the conversation and give your feedback.

Have Your Say

New to commenting? Check out our Frequently Asked Questions.

Have Your Say

Comments are open to Winnipeg Free Press print or e-edition subscribers only. why?

Have Your Say

Comments are open to Winnipeg Free Press Subscribers only. why?

The Winnipeg Free Press does not necessarily endorse any of the views posted. By submitting your comment, you agree to our Terms and Conditions. These terms were revised effective April 16, 2010.


Make text: Larger | Smaller


I Dream of Diesel at Rachel Brown Theatre scene preview

View more like this

Photo Store Gallery

  • PHIL HOSSACK / WINNIPEG FREE PRESS 060710 The full moon rises above the prairie south of Winnipeg Monday evening.
  • KEN GIGLIOTTI  WINNIPEG FREE PRESS / July 23 2009 - 090723 - Bart Kives story - Harry Lazarenko Annual River Bank Tour - receding water from summer rains and erosion  damage by flood  and ice  during spring flooding -  Red River , Lyndale Dr. damage to tree roots , river bank damage  , high water marks after 2009 Flood - POY

View More Gallery Photos


Do you think the Jets will win Game 4 on Wednesday?

View Results

View Related Story

Ads by Google