The P/E Trick.. Why Might a "Expensive" Stock Be Cheaper Than You Think?
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In the world of investing,
The first number everyone learns is the (P/E Ratio).
You see it low (for example, 10 or 15), and say: "Wow! This is a cheap stock."
And you see it high (for example, 40 or 50),
and say: "Impossible! This stock is overhyped."
But the picture in front of you proves that this logic could be the biggest trap your portfolio falls into.
The P/E tells you what is happening "NOW," but it is completely blind to what will happen "TOMORROW."
Therefore, professionals do not rely on it alone; they use the "truth detector":
The PEG ratio
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1. The First Story: The Illusion of "High Price" (Nvidia)
Look at Nvidia in the example:
The P/E ratio (P/E) is 45.
At first glance, it looks like a terrifying number.
You pay $45 for every dollar of profit.
Many will run away here.
But.. the company is growing at a rocket speed of 50% annually.
Here comes the PEG formula (Price to Growth):
Divide the P/E by the growth rate:
45/50=0.9
Result: The number is less than 1.
In financial language, this means that despite its apparent high price, the stock is actually a "cheap deal" compared to its huge growth.
You are buying a "Ferrari" at a reasonable price.
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2. The Second Story: The "Cheap" Trap (Value Trap)
Let’s look at the other company (Comparison Co):
The P/E ratio (P/E) is 20. It looks very attractive and safe,
Doesn't it?
But.. the company is old, and grows very slowly at only 5%.
Let’s apply the PEG formula:
20/5=4.0
Result: The number 4 is four times the fair value!
This means you are buying a stock that seems cheap, but in reality, you are paying a huge amount for almost no growth.
This is what we call a "Value Trap"; you buy a "horse-drawn carriage" at the price of a car, thinking you saved money.
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💡 The Golden Rule (The Rule of Thumb): PEG
Less than 1: The stock is undervalued (Buy Opportunity).
PEG equals 1: The price is exactly fair.
PEG greater than 1 (Especially above 2): The stock might actually be overhyped.
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Financial Summary:
Don’t be fooled just by looking at the current price (P/E).
Investing is about buying the "future" (Growth),
and not buying the "past". The next time you see a stock with a high P/E ratio, don’t dismiss it immediately..
First ask: "How fast is its growth?"
It might be the opportunity everyone has been waiting for.
And you.. do you review the growth rate before buying,
or do you settle for the P/E ratio?
Follow me for more smart financial tools $BTC
-
In the world of investing,
The first number everyone learns is the (P/E Ratio).
You see it low (for example, 10 or 15), and say: "Wow! This is a cheap stock."
And you see it high (for example, 40 or 50),
and say: "Impossible! This stock is overhyped."
But the picture in front of you proves that this logic could be the biggest trap your portfolio falls into.
The P/E tells you what is happening "NOW," but it is completely blind to what will happen "TOMORROW."
Therefore, professionals do not rely on it alone; they use the "truth detector":
The PEG ratio
-
1. The First Story: The Illusion of "High Price" (Nvidia)
Look at Nvidia in the example:
The P/E ratio (P/E) is 45.
At first glance, it looks like a terrifying number.
You pay $45 for every dollar of profit.
Many will run away here.
But.. the company is growing at a rocket speed of 50% annually.
Here comes the PEG formula (Price to Growth):
Divide the P/E by the growth rate:
45/50=0.9
Result: The number is less than 1.
In financial language, this means that despite its apparent high price, the stock is actually a "cheap deal" compared to its huge growth.
You are buying a "Ferrari" at a reasonable price.
-
2. The Second Story: The "Cheap" Trap (Value Trap)
Let’s look at the other company (Comparison Co):
The P/E ratio (P/E) is 20. It looks very attractive and safe,
Doesn't it?
But.. the company is old, and grows very slowly at only 5%.
Let’s apply the PEG formula:
20/5=4.0
Result: The number 4 is four times the fair value!
This means you are buying a stock that seems cheap, but in reality, you are paying a huge amount for almost no growth.
This is what we call a "Value Trap"; you buy a "horse-drawn carriage" at the price of a car, thinking you saved money.
-
💡 The Golden Rule (The Rule of Thumb): PEG
Less than 1: The stock is undervalued (Buy Opportunity).
PEG equals 1: The price is exactly fair.
PEG greater than 1 (Especially above 2): The stock might actually be overhyped.
-
Financial Summary:
Don’t be fooled just by looking at the current price (P/E).
Investing is about buying the "future" (Growth),
and not buying the "past". The next time you see a stock with a high P/E ratio, don’t dismiss it immediately..
First ask: "How fast is its growth?"
It might be the opportunity everyone has been waiting for.
And you.. do you review the growth rate before buying,
or do you settle for the P/E ratio?
Follow me for more smart financial tools $BTC
