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Q: I’ve set some stop orders on stocks I bought at around 15 to 20 percent below the current price. This has resulted in my selling promising stocks before they have a chance to perform. What am I doing wrong?
A: Stop orders are placed with brokers to automatically sell shares if they drop to a certain level. They’re meant to protect you if a stock suddenly plunges. But they’ll also kick you out of stocks that drop briefly. If you’re planning to hang on to a stock for years, you might want to just expect some volatility and avoid stop orders. But do keep up with your holdings regularly.
Q: Is it better for a company’s projected price-to-earnings ratio (PPE) to be higher or lower than the price-to-earnings ratio (P/E)?
A: The P/E is simply a company’s current stock price divided by its earnings per share (EPS) for the trailing 12 months. The projected P/E divides the stock price by next year’s projected EPS.
Investors like to see a PPE lower than a P/E because it means that earnings are expected to rise. Imagine Porcine Aviation (ticker: PGFLY) trading at $30 per share with EPS over the past year of $2. Its P/E would be 30 divided by 2, or 15. Assume that Porcine is expected to enjoy rapid earnings growth, raking in EPS of $3 next year. If so, then its PPE would be 30 divided by 3, or 10. Its PPE is lower than its P/E due to expected growth.
Remember, though, that earnings can be manipulated and estimates can be proven wrong. So don’t make decisions based on P/E or PPE alone.