Quote:
Originally Posted by Vegas69
I'm still pretty green at this. How the heck does Chipolte demand $600 a share where say CVS demands $100? Or Starbucks demands $80? Is that an indication that it may split?
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Chipotle Mexican Grill (CMG) has a Price to Earnings (P/E) ratio of 41 --- so people are paying 41 dollars for each dollar of earnings (currently) for this stock. A high P/E ratio often reflects the "EXPECTED" growth of the earnings in the FUTURE of the stock.
Spits are more about whether or not the BOARD is prone to splits. Some boards are and some aren't. If the shares split - it doesn't increase (or decrease) value - there's just more shares at less value per share. People get excited about them and sometimes that drives new money to the shares. Netflix (NFLX) is splitting 7 for 1 --- it trades for $700 a share - so if you had 100 shares at $700 each - you'll just have 700 shares worth $100 each. This often "fools" small investors into finally getting into the shares because they're now "affordable" - which is complete nonsense....
CVS Health Group (CVS) has a P/E of 26... which just means (or can mean) that it still has a quite high expected growth rate of it's earnings. The average P/E is "normally" closer to 15..... and the "pros" start talking about the market being overvalued when it starts to hit 17ish. In a Bear market period - you'll see average P/E's in the 12's...
Starbucks (SBUX) P/E is 32.... a still "high" expected earnings growth rate.
Now -- so as not to confuse -- let's see how many SHARES each of these three have 'outstanding'.
SBUX - 1.5 BILLION shares.... Earnings PER SHARE $1.70
CVS - 1.13 BILLION shares.... Earnings PER SHARE $4.10
CMG - 31 MILLION shares.... Earnings PER SHARE $15.38
The key is --- what do you think a company will be earning in the years ahead --- or what their growth rate is etc. Like any "market" - how many people want to OWN something versus SELL something.
Beware high multiple P/E stocks IF they manage to not live up to the expectations.... you get killed overnight!