Bust The Tipsters! - Case #3: The Case of The Trailing Earnings

Bust The Tipsters!

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Case #3: The Case of The Trailing Earnings
By MF Templar
Polly Truheart scanned the stock tables of her morning paper, aching to find that one investment that would make her life complete. She had been hearing rumors that a company called FLYOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FLYR)") else Response.Write("(Nasdaq: FLYR)") end if %> had developed an incredible new widget that would completely revolutionize the widget industry.
Scanning the price list, she saw much to her chagrin Flyomega had jumped from $40 1/2 to $48 3/4 yesterday on share volume of more than five times the normal average, according to the convenient Investor's Business Daily numbers.
"Gosh-darnit, I missed Flyomega again," Polly cried, her voice tremulous. "Here I have been waiting like a Fool to get a few hours to actually do some research on the thing and it has been scaling up to new highs like a monkey set loose on a ladder." She stared at the information she had just received from the company, about to go through and do some thorough homework before buying the shares.
Watching from the shadows, the evil Mo-Mental knew that this was the ideal time to strike. Costumed in a tight body suit covered with jagged bolts of lightning meant to connote "mental energy," Mo-Mental had the curious ability to push investors into making rash decisions through telepathy.
"She is vulnerable now," Mo-Mental cackled. "She wants to buy the stock, no matter what the price, and I will help her." Mo-Mental began to sent out telepathic waves of domination, urging Polly to pick up her friend and call the TradeOften brokerage, an unscrupulous enterprise that paid Mo-Mental to urge clients into making frequent trades.
"Must .... buy ... stock ... now!" Polly was overwhelmed, her hand reaching over to the phone as if on automatic pilot. Just as she started to dial, bells began to jingle and a gloved hand reached out and forced her to replace the phone on its cradle.
"Don't succumb to Mo-Mental, Polly," Motley Fool cried. "Look at the information in front of you before buying that stock! Most importantly, take a gander at the price/earnings ratio, an excellent guage of how much you are paying for the growth that the company can generate."
Polly immediately saw the stock, priced at $48 3/4, had earnings per share (EPS) of 12 cents over the last four fiscal quarters (a year). As the price/earnings ratio is simply the current price divided by the "trailing" earnings per share, the amount of earnings from the last four trailing quarters, she immediately saw that Flyomega was valued at:
1) 17.5 times earnings
2) 406.25 times earnings
3) 0.0025 times earnings
4) 4.06 times earnings

The answer is 2.
Polly immediate saw that Flyomega was priced at 406.25 times trailing earnings. Although the price/earnings ratio is in no way the ultimate arbiter of stock-market value, Polly knew that the higher the current price/earnings ratio (or multiple), the more a company would have to grow in order to generate a higher stock price. At 406.25, a company would need to grow in excess of 400% to 500% in order to return value to shareholders -- something that would take a lot of hard work and reading through the financials in order to ascertain for certain.
"Thanks, Motley. I don't know what came over me." Polly stood up and hugged the bell-capped Fool.
"Not a problem, Polly," Motley said, blushing a bit. "Most new investors can get caught up in the excitement of seeing a stock rise and never stop to do their homework before they go to invest. Now that you can figure out the price/earnings ratio, though, you are well on your way to making intelligent investments."
Mo-Mental, foiled again, slunk off to find an unsuspecting non-Fool. These darn Fools were all being taught these blasted telepathic shields by that Motley Fool fellow.

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RULES & PRIZES \| HEROES & VILLAINS \| STANDINGS \| ARCHIVE
Case #3: The Case of The Trailing Earnings By MF Templar Polly Truheart scanned the stock tables of her morning paper, aching to find that one investment that would make her life complete. She had been hearing rumors that a company called FLYOMEGA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FLYR)") else Response.Write("(Nasdaq: FLYR)") end if %> had developed an incredible new widget that would completely revolutionize the widget industry. Scanning the price list, she saw much to her chagrin Flyomega had jumped from $40 1/2 to $48 3/4 yesterday on share volume of more than five times the normal average, according to the convenient Investor's Business Daily numbers. "Gosh-darnit, I missed Flyomega again," Polly cried, her voice tremulous. "Here I have been waiting like a Fool to get a few hours to actually do some research on the thing and it has been scaling up to new highs like a monkey set loose on a ladder." She stared at the information she had just received from the company, about to go through and do some thorough homework before buying the shares. Watching from the shadows, the evil Mo-Mental knew that this was the ideal time to strike. Costumed in a tight body suit covered with jagged bolts of lightning meant to connote "mental energy," Mo-Mental had the curious ability to push investors into making rash decisions through telepathy. "She is vulnerable now," Mo-Mental cackled. "She wants to buy the stock, no matter what the price, and I will help her." Mo-Mental began to sent out telepathic waves of domination, urging Polly to pick up her friend and call the TradeOften brokerage, an unscrupulous enterprise that paid Mo-Mental to urge clients into making frequent trades. "Must .... buy ... stock ... now!" Polly was overwhelmed, her hand reaching over to the phone as if on automatic pilot. Just as she started to dial, bells began to jingle and a gloved hand reached out and forced her to replace the phone on its cradle. "Don't succumb to Mo-Mental, Polly," Motley Fool cried. "Look at the information in front of you before buying that stock! Most importantly, take a gander at the price/earnings ratio, an excellent guage of how much you are paying for the growth that the company can generate." Polly immediately saw the stock, priced at $48 3/4, had earnings per share (EPS) of 12 cents over the last four fiscal quarters (a year). As the price/earnings ratio is simply the current price divided by the "trailing" earnings per share, the amount of earnings from the last four trailing quarters, she immediately saw that Flyomega was valued at: 1) 17.5 times earnings 2) 406.25 times earnings 3) 0.0025 times earnings 4) 4.06 times earnings
The answer is 2. Polly immediate saw that Flyomega was priced at 406.25 times trailing earnings. Although the price/earnings ratio is in no way the ultimate arbiter of stock-market value, Polly knew that the higher the current price/earnings ratio (or multiple), the more a company would have to grow in order to generate a higher stock price. At 406.25, a company would need to grow in excess of 400% to 500% in order to return value to shareholders -- something that would take a lot of hard work and reading through the financials in order to ascertain for certain. "Thanks, Motley. I don't know what came over me." Polly stood up and hugged the bell-capped Fool. "Not a problem, Polly," Motley said, blushing a bit. "Most new investors can get caught up in the excitement of seeing a stock rise and never stop to do their homework before they go to invest. Now that you can figure out the price/earnings ratio, though, you are well on your way to making intelligent investments." Mo-Mental, foiled again, slunk off to find an unsuspecting non-Fool. These darn Fools were all being taught these blasted telepathic shields by that Motley Fool fellow.