Significant P/E and P/B Movements

Yesterday the market experienced a significant median P/E drop from 15.3 to 14.4 due to stable earnings combined with price dips.   

This is the lowest median P/E level since early February, and one of the lowest levels in months.  Interestingly, median P/B significantly increased from 2.01 to 2.16.  This observation suggests that asset levels are decreasing while earnings are increasing, both compared to price.

I have a preference for investing on P/B rather than P/E.  Earnings are much more volatile than assets, and can inaccurately distort a company's worth for a quarter.  For example, the biotechnology company Anacor (ANAC) maintained a 0 P/E for months because it had no positive net income.  

After last quarter's earnings announcements it boasted a nice P/E of 9.  Now this influx of "earnings" was not from its operations, but from a one-time lawsuit settlement of $150M+, which without it, would have had another quarter of negative net income.

Speculators began to get greedy and spiked the price up near an all-time high.  Now, as insightful investors we know that the market always overcorrects itself.  That came true for ANAC, as it lost about 30% of its value in the past week, along with many other overpriced biotechs.

The lesson here is that if you're going to put your hard earned money in a stock, make sure you are receiving something back in return (cash, inventory, land, equipment).  Simply receiving a possibility of increased earnings is not enough.  Companies are never guaranteed to earn its projections, however tangible assets are a guaranteed return on your investment, and something that will almost always be in demand (unlike speculative earnings).

Happy Trading to all

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