Ask Colin

In BRW 26 July 2003 you discussed ABC Learning Centres (ABS), but it has a PE ratio of 21.9 versus the industry ratio of 13. Am I missing something?

Yes, I am afraid you are.

In the discussion I said:

"This column has maintained a focus on buying uptrending stocks that have low price/earnings ratios. Although this approach will also work well when the bulls again begin to roam the bourse, an additional strategy will become appropriate - buying growth stocks.

A chart that seems to be developing in the pattern typical of good growth companies is ABC Learning Centres (ABS).

I have bolded the bit I think you have missed.

I operate on two models of how markets work - the value model and the growth model. I outlined them in Shares Charting Guide Issue No 1, which is now sold out, but the articles are on my subscription web site. They are also outlined in my videotape Building Wealth Through Shares.

What I was trying to say is that the value model has been working well, but it was coming to the time when the growth model would also come back into use. ABS is a stock that fits the growth model. The PE ratio of growth stocks tends to higher than for value model stocks, because of their expected growth. However, their ratios can also be too high. A PE ratio of 22 when the market average is about 15 is demanding, but not overly so.

PS Although I owned ABC Learning Centres myself, I subsequently sold it when it gave one of my sell signals. This was well before it became obvious that there were big problems. It is a further reminder that failing companies almost invariably give warning signs some years before the end.

Keywords: