Stock Multiples: How to Tell When a Stock is Cheap/Expensive

Investing in the stock market takes a lot of knowledge, skills, and the right timing
to ensure that we are not going to lose much when we invest. Knowing that the stock
market is susceptible to change, volatile, and unstable, as future investors, we should be
familiar with how to properly, proximately, and positively when to invest. As mentioned in
the video, there’s this old saying that says “buy low, sell high” which is one of the most
common knowledge that everyone knows in the world of investing. Even I, when I took
GENMATMW on my frosh year, we had an investment simulation through Investagram
and the only thing I knew is that buy when the price is low and sell when the price spikes.
However, this video of Richard Coffin of The Plain Bagel channel on YouTube, thoroughly
and clearly explained how to tell when a stock is cheap and/or expensive which would
determine whether it’s just right to buy or sell the stocks.

According to Richard Coffin, there’s no perfect answer to what prices are

considered high or low, the only thing we can do is to gauge how expensive or cheap a
stock is and by using multiple or what I have learned in ACYFMG 1, the P/E Ratio. It
compares a stock’s price to some fundamental number and the higher the multiple, the
more expensive a stock is considered. The Price to Earnings ratio or the P/E Ratio is a
straightforward method to determine the stock price which is processed by dividing the
company’s earnings per share. However, the disadvantage of it is that it is historical that’s
why it is called Trailing P/E which means it’s backward-looking while the market is
forward-looking since a lot of internal and external factors affect the market constantly.
But to counteract this shortcoming, one could utilize the forward P/E or the ratio that
divided the stock’s price of the company by how much a company is expected to make
next year.

There are a lot of multiples that can be considered, and the video has explained it
thoroughly. I am glad to watch it because it’s additional information to what I have recently
learned through the ACYFMG 1 course. It is the same, but I was able to know that there’s
a trailing and forward P/E and that the latter is more preferred in terms of investing since
it complements the stock market. It is why financial ratio and forecasting have a really
direct relationship that allows certain multiples like the P/E ratio to be formulated.

VIDEO LINK: https://tinyurl.com/StockPriceHighLow