In this red-hot stock market it’s hard to find a bargain. So when you see P/Es around 10 from one of this country’s best companies – when the rest of the market is topping out around 17 – it may be hard to pass up. But think again.
Deere & Co. (NYSE: DE) has been one of my favorite stocks since 2009. It is coming off a huge year and the P/E is only about 10. On the surface this one seems like a slam dunk; a great name, solid business model, all the right moves, but look deeper.
Earnings are expected to fall 8% this year and 17% next. And the bottom for its problems is not expected to form for two more years.[ad#Google Adsense 336×280-IA]Corn prices have slumped to a four-year low, which will hurt Deere’s numbers going forward, and a bubble in farm land prices is adding to the tough sledding analysts are expecting for this market stalwart.
A P/E of 10 doesn’t look so cheap now in that light.
On the other hand…
Hewlett-Packard (NYSE: HPQ) has a P/E in the 10 range but with very different expectations.
Shares have doubled since 2013 and were up 5% in one day recently.
The stock is up 13% since April and still looks cheap.
Management is cutting costs across the board and reducing debt; all the right moves. PC sales are expected to continue to decline but are forming a bottom.
Flat sales are a positive, but last quarter sales grew year over year for the first time in three years.
Citi analysts see shares running ahead of estimates and could deliver double-digit returns next year.
Two stocks with similar P/Es but a world of difference in their expected growth of earnings and revenues. And going forward, that is what it will all be about: earnings and revenue growth.
In this market even in the big names, you have to look beyond the ratios.
— Steve McDonald[ad#wyatt-generic]
Source: Investment U