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Best columns: Short shrift, Price-earnings rationale
“The price-earnings ratio is a popular tool for investors,” says Ben Steverman in BusinessWeek.com, but is it really “the best way to gauge stocks?” The SEC is clamping down on short selling,&
 

 

The price-earnings calculus

“The price-earnings ratio is a popular tool for investors,” says Ben Steverman in BusinessWeek.com, but with today’s wildly fluctuating share prices and earnings, is it really “the best way to gauge stocks?” The p-e ratio is supposed to answer one question: Is a stock cheap enough to be a bargain for long-term investment? But the answer depends on how you look at earnings. If you look at forward earnings projections for S&P 500 shares, for instance, the p-e ratio is 12.2—“cheap by most historical comparisons”—but the trailing p-e ratio is a nebulous 16.6. On the whole, today’s p-e ratios suggest investors with the “stomach to handle a wild ride” over a few years would do well to buy.

Shooting the short messenger

Until recently, U.S. policymakers were actually doing pretty well in this financial crisis, says Sebastian Mallaby in The Washington Post. “Now Washington is losing it.” The Securities and Exchange Commission is clamping down on short selling, starting today, but that will just defang a key market watchdog. Short sellers publicly bet against a stock they think is overvalued, and as with all pessimists, people don’t like them for it—we prefer bubble-feeding stock boosters, even if they’re wrong. The “anti-short witch hunt” is dumb, and potentially tragic. Because “despite popular myth, the strength of the American economy does not lie in boundless optimism. It lies in optimism spiked with honesty.”

 

 

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