Using Normalized P/E Ratios to Project Future Stock Price Movement

Abstract

Many financial analysts prefer to normalize a firm\u27s key drivers of growth i.e., revenues and earnings, in order to obtain a clearer picture of its financial prospects. In this study, we look at a sample of stocks from the Dow Jones Industrial Average to evaluate normalized price-earnings ratios. Using 5 and 10 year averages of earnings and current price i.e. P/NE, we compare the Normalized Price-Earnings Ratio to the firm\u27s price-earnings ratio with current earnings. If P/NE is greater than P/CE, we would expect P/CE to trend upwards especially over short periods of time. If P/NE \u3c P/CE, we would expect P/CE to trend downward. In both cases, we would expect the stock price to be the primary mover over short periods of time, i.e. 6-12 months. We test our hypothesis for the year 2012 based on 10 years of previous data.https://ecommons.udayton.edu/stander_posters/1365/thumbnail.jp