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QuestionsCategory: Exit StrategiesSelling Stock
Chui Ong asked 5 years ago

Hi, 
When selling a stock based on P/E (bought when P/E was below average PE), should we look at just the current PE or should we look at the forward P/E? 
I am thinking we should look at the forward P/E since this means that the price of the stock may go up some more. However, I am also worried that the forward P/E value may not materialize. Is this a valid concern? How can I get around this concern?
Thank you!
 
 

4 Answers
Victor Chng answered 5 years ago

Hi Chui Ong,
 
Forward PE are estimated earnings projection by the Analyst. What I usually use is either historical or rolling PE. I don;t look at forward PE because projection may not be accurate.

Victor Chng answered 5 years ago

Hi Chui Ong,
 
Forward PE are estimated earnings projection by the Analyst. What I usually use is either historical or rolling PE. I don;t look at forward PE because projection may not be accurate.

Chui Ong replied 5 years ago

Hi Victor,

To be more specific, I was actually looking at MSFT. I considered it undervalued when it’s PE was below 15 and probably overvalued once it’s PE goes above 25.

In the recent 2 years, it’s PE has risen to almost 30, yet its stock price still kept increasing.

From what I have been reading, the exuberance is mainly due to “high expectations” for MSFT’s cloud business. Which was why I was wondering if there is a need to look at the forward PE (by factoring potential higher revenue. From morningstar.com, MSFT forward PE is only 21, which makes me think maybe can hold a bit longer?

In such a case, what would you do? Would you sell since its PE is already at 30 (overvalued), or adopt a wait and see approach (but what exactly should one look out for)?

Thanks!

Victor Chng replied 5 years ago

High expectation by investors is what I am usually afraid of. When the expectation subside same goes the share price. I want share price to be back by fundamental instead of expectation. In the case of MSFT, If I ever owned it and it hit the PE above the historical high PE of 25. I will probably sell some of the shares to get back my initial investment and leave the profit in the market. I will slowly sell the left over if the expectation continue to be high and the share continue to move up.

Thomas answered 5 years ago

Hi Victor,
 
I have a question, what if I bought at fair price but then the share price increases to PE of 30. Do you still sell a portion of it and leave the profit or sell all?

Victor Chng answered 5 years ago

Hi Thomas,

I will most likely sell all as i think the company may be too expensive. Unless the company is still growing fast than I will probably keep the profit