Industry Price-Earnings - The NASDAQ Dozen
Industry Price-Earnings
The last factor you want to review is the industry price to earnings (P/E) ratio compared to the stocks price-earnings ratio. Industry P/E ratio is located toward the bottom of the Analyst Research & Recommendations page under the heading Price/Earnings (12/2007) EPS Summary .
Importance of Industry P/E
It is important to look at the P/E ratio of the industry group to determine
what the average expectation for earnings growth is compared to the
competition. You’ll want to see that the stock in question has a P/E ratio at
or below its industry group average. The higher the P/E ratio is for the stock,
the higher the future expectations are. If expectations are too high, there is
added pressure on the stock to produce higher earnings; i.e.; the stock’s price
may depreciate if it cannot keep up with future expectations.
Scoring Industry P/E
- Pass—Give this factor a passing score if the company’s P/E ratio is lower than the industry group average.
- Fail—Give this factor a failing score if the company’s P/E ratio is higher than the industry group average.
Looking at the P/E ratio for GOOG compared to its industry in Figure 16 , it should receive a failing score. Google has a higher P/E ratio than the industry group average.
Industry P/E: FAIL
Figure 16—Industry P/E Ratio
Putting it All Together
After scoring all 12 factors of the NASDAQ Dozen for GOOG, the stock scores an
11:1.
| 1. 50-Day Average Volume | PASS |
| 2. Short-Term Price Movement | PASS |
| 3. Long-Term Price Movement | PASS |
| 4. Revenue | PASS |
| 5. Earnings per Share (EPS) | PASS |
| 6. Net Income | PASS |
| 7. Analyst Recommendations | PASS |
| 8. 12-Month Price Target | PASS |
| 9. Positive Earnings Surprises | PASS |
| 10. Earnings Increases | PASS |
| 11. Industry Earnings | PASS |
| 12. Industry Price/Earnings | FAIL |
| TOTAL | 11:1 |
You can’t ask for a much better score than this. But now that you’ve done all of this, what does it really mean? Is it a guarantee the stock will go up? Certainly not. Investing is an exercise of analyzing information and putting your money where you have the most confidence and the greatest likelihood of success. There are no guarantees.
Using the NASDAQ Dozen arms you with the data you need to make an informed decision and to put the odds of success in your favor. To get started, check the stocks you currently have in your portfolio and see how they stack up. You may be surprised.
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