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Safe Money Report

July 20, 2001

Back to the Bubble?

Question: You often have the P/E ratios for indexes in your daily commentary and the Safe Money newsletter. With the spate of dismal earnings reports, what is the average P/E ratio for stocks in the Dow and the Nasdaq?

Answer: Not all companies have released their earnings reports for the current quarter, but we see indications that P/E ratios are on the rise and stocks are becoming overvalued once again.

The evidence is most clear when looking at the Nasdaq. With the beating that tech stocks have taken over the past year, you would think that tech stock P/E ratios would have returned to earth. But they're still sky-high! We can't even calculate how high because earnings for the average company in the Nasdaq are negative. The last time there was a calculable P/E ratio for the Nasdaq, it was an outrageous 4,709 on May 4, 2001. That means it would take 4,709 years for the average company in the Nasdaq to earn its share price. Today's negative P/E ratio means that, with no earnings, it would take forever for the average company in the Nasdaq to earn its share price. That's a pretty long time to wait.

Even the blue chips are creeping up -- the average P/E ratio for the 30 stocks in the Dow is 24.28 today, up from 20.43 in January. And it isn't because the stock market is higher today than it was in January; the P/E ratio has increased because earnings are lower.

We haven't heard much good news from company executives this earnings season. Most won't offer a prediction of when things will get better, and the ones that do are only hoping that they're right.


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