The benchmark PSE index is now 12 percent below where it was on Election Day, and more than 16 percent below the last peak of the market in early October.
As a result of the broad-based decline in the stock market during this period, most stocks are now trading well below their historical P/E ratios.
This is usually a buying signal, as investors work on the assumption that valuations tend to revert to their average levels.
However, it must be noted that deciding to buy based on this assumption could be the wrong move.
Sometimes, a declining P/E ratio could reflect deeper fundamental issues such as declining returns, narrowing margins, or slowing revenue growth. (The price-to-earnings (P/E) ratio compares a company’s stock price to its earnings, helping investors judge whether the stock is undervalued or overvalued based on its profit potential).
Take, for example, Bloomberry Resorts Corp. (BLOOM), which is the top index loser for Nov. 5 to Jan. 20. The stock is now trading at a trailing 12-month P/E ratio of 10x, which is half of its seven-year average P/E ratio of 20x.
Normally, it would be considered undervalued at these levels, but one must also consider that gaming revenue growth in Entertainment City has been slowing in recent quarters due to weakness in the VIP segment.
BLOOM also recently launched a new location in Quezon City, which is currently contributing more to expenses than revenues. These two factors led to BLOOM reporting a net loss in 3Q24, its first quarterly loss since 2021.
The consensus forecast is that BLOOM’s profitability will remain weak throughout 2025, and this is reflected in the way the market values the company.
On the other side of the spectrum, we have Converge ICT (CNVRG) as the top index gainer for the same period. It is also undervalued and currently trading at a 12x P/E ratio versus its 7-year average P/E ratio of 17x.
However, what makes it truly attractive is how CNVRG currently outperforms its telco giant peers in terms of revenue growth (17.2 percent versus 2.0 percent), operating margin (41.4 percent versus 22.6 percent), and profit margin (28.0 percent versus 15.7 percent).
It is also a relatively younger enterprise compared to its more mature peers, which gives it more room to grow and expand its revenue base.
These two examples best illustrate how a smart investor should go deeper than the basic approach of looking at P/E ratios. While we do not discount the value of P/E ratios as a valuation metric, one should also look at other fundamental measures such as return on equity, earnings and revenue growth, margins, and cash flows.
It is also useful to compare these metrics not only with the company’s historical performance but also with its competitors in the industry, as this gives a good overview of where the company is in the market and how it is faring against similarly positioned companies.
It can be scary to jump into the market when it seems to be in a perpetual state of decline, and choosing the right stock to buy can be daunting.
However, it is not impossible, and opportunities still abound.
The challenge is how we identify and interpret the data disclosed by these companies to make informed investment decisions.
As we illustrated earlier, we should take caution in purely relying on one metric or valuation ratio.
Instead, we should pair it with other measures to help give an overall idea of the current financial standing of the company. Lastly, it’s also important to keep tabs on competitors to see a more detailed picture of the industry and the companies that belong to it.
