[GregWeld]

Many of you have asked about P/E RATIOS.... to which I say it's a metric that I don't use much -- except to determine if a stock is priced to perfection or as a comparison against other companies in their sector. BUT ---- If you eliminated all high P/E ratios -- that would mean that you're not buying companies that the market (and management) is telling you they EXPECT to earn more going forward. High GROWTH is usually rewarded with high P/E's. So don't use just that metric to buy -- and don't use that metric to stay out of a good company. Thus I "down play" this metric.


Here's were P/E (P = price of the stock - divided by - E = EARNINGS) ratios matter.....


When a company with a "high" P/E "misses" and or takes guidance down (tells you they're not going to make as much EARNINGS going forward.


WHOLE FOODS (WFM) missed (as they have done several quarters now) AND they said "we're not going to have the high growth in EARNINGS that we have had in the past" <not an actual quote>. The stock gets crushed. Why? Because the P/E was unusually high compared to others in the industry and the "market" had expectations that they'd grow into the high P/E.



Now the "market savvy" INVESTING 102 takeaway...... if it was a name you've been looking at -- or perhaps already own.... and you see this big "DIP". Do you buy more --- or SELL?


When a company comes out and misses -- and lowers guidance... That is a FUNDAMENTAL CHANGE which I've said many times in the past is an event that really needs to be examined!!! BUYER BEWARE!! WARNING -- DANGER AHEAD.... DO NOT TRY TO CATCH A FALLING KNIFE would be the normal mantra.

Here's when you step back and WAIT and WATCH. This is a really good company.... but the STOCK needs to settle in with the new earnings (we don't know what that is going to be in the future!).... LONG TERM it might be great -- but there is a "reset" to the share price... Let's wait and see what that is. YOU don't set that --- the big boys do.... wait until they're done if you want to buy. This might take a couple QUARTERS not days....

The rest of their story might be fine -- but the EARNINGS matter.


I'm using WHOLE FOODS today as nothing but an example --- I don't own it - I have in the past -- This is not a STOCK PICKING DISCUSSION.... I'm not saying buy or sell WFM ---- I'm simply using it's recent miss --- as an opportunity to discuss P/E's and WHEN they matter.