Ask Colin

In light of changing market conditions, are you using PE5 and P/NTA

In light of changing market conditions, are you using PE<;10, Div Yield>5 and P/NTA <;2 as your filter for value stocks?

Yes and no. Let me explain.

I am now finding that the PE ratio alone will find the stocks I am looking for. However, I do look at the Dividend Yield and P/NTA once I find that a stock with a low PE has a good chart.

The advantage of using only the PE ratio as the filte ris that it finds stocks that have low PE ratios, but not paying a dividend. These are sometimes worth watching as recovery situations. They might have moved a lonf way before they pay a dividend.

However, we need to be careful with them - a stock that has passed a dividend or never paid one is more risky that one that has a long history of paying dividends.

As for the PE ratio filter, I am now adjusting it for inflation. So, I take the 10 year bond yield, add 50% risk premium to get an equivalent earnings yield. Divide the earnings yield into 1 and you have the target PE ratio. I described this method mid 2002 for the first time in the mini course on my subscription web site.

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