The Financial Times Guide to Selecting Shares that Perform: 10 ways to beat the stock market (The FT Guides) by Richard Koch & Leo Gough

Author:Richard Koch & Leo Gough
Language: eng
Format: mobi
Publisher: Pearson Education Limited
Published: 2014-03-26T14:00:00+00:00

Surprise Surprise: Earnings = £15m

Surprise Surprise: PE = 20

Surprise Surprise: Value = £15m times 20 = £300m

In other words, the shares are now worth three times their previous value, even though earnings are up only by half. There is a good reason for this: if earnings do continue to rise, the cash that can be collected over the years goes up dramatically. Yet the effect in terms of share price appreciation can be stunning.

Does re-valuation of a share happen overnight?

Only very rarely. You generally have to wait a few months or even a year or two before the market appreciates the change in trend and its implication for long-term valuation. This means that you cannot expect to see your shares triple over a week, though you may see this happen over a year or two, which should be good enough for most of us! And herein lies your opportunity, not to be the lucky holder of shares with an earnings spurt, but to spot the earnings acceleration before the market marks up the shares appropriately.

So at last (with apologies for the theoretical excursion into PEs) we reach the point of this chapter, and the basis for many investors’ practice: buying shares in companies whose earnings are appreciating, before the PE adjusts as it should and probably will. This is a very exciting way to beat the stock market, because it can produce a doubling or more in share values over a year or two, and it is feasible for those who have the right skills and temperament.

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