I use the P/E Gap for identifying long- and short-term trading opportunities. The approach finds stocks trading inefficiently by comparing a stock’s price-to-earnings ratio to its expected profit growth rate.
It’s helped me spot several overvalued turkeys that need to go on the block now.
When the gap is negative – the P/E ratio is smaller than the expected profit growth rate – a stock is said to be undervalued. The reverse is true when the P/E Gap is positive – which occurs when the P/E ratio is higher than the expected profit growth rate. These are the stocks to sell and sell quickly.
Tesla Motors (TSLA) is a good example. Tesla shares have been in a free-fall after brushing up against $200 per share in September. The headlines for Tesla’s stock collapse have focused on disappointing earnings and the more sensational fires that have suddenly plagued the new car company. Both are true, but the P/E Gap suggested this one was due for a major collapse. Tesla’s valuation can’t be supported by operations. It’s that simple and the PE Gap can help you sniff that out.
With Thanksgiving upon us, I thought it might be appropriate to identify the P/E Gap turkeys. These are stocks that jumped out at me when I last ran my P/E Gap calculations at the end of October. While two of the three stocks below have indeed gone down in value in November, they are still overvalued.
Sell these turkeys now before it’s too late: