Yahoo Finance Is It Time To Buy Select Medical Holdings Corporation (NYSE:SEM) Based Off Its PE Ratio?
This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Select Medical Holdings Corporation (NYSE:SEM).
Select Medical Holdings Corporation (NYSE:SEM) trades with a trailing P/E of 12.7x, which is lower than the industry average of 21.9x. While SEM might seem like an attractive stock to buy, it is important to understand the assumptions behind the P/E ratio before you make any investment decisions. In this article, I will explain what the P/E ratio is as well as what you should look out for when using it. View out our latest analysis for Select Medical Holdings
Breaking down the P/E ratio
The P/E ratio is one of many ratios used in relative valuation. By comparing a stock’s price per share to its earnings per share, we are able to see how much investors are paying for each dollar of the company’s earnings.
P/E Calculation for SEM
Price-Earnings Ratio = Price per share ÷ Earnings per share
SEM Price-Earnings Ratio = $18.5 ÷ $1.46 = 12.7x
On its own, the P/E ratio doesn’t tell you much; however, it becomes extremely useful when you compare it with other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as SEM, such as size and country of operation. A common peer group is companies that exist in the same industry, which is what I use. SEM’s P/E of 12.7x is lower than its industry peers (21.9x), which implies that each dollar of SEM’s earnings is being undervalued by investors. As such, our analysis shows that SEM represents an under-priced stock.
Assumptions to be aware of
However, before you rush out to buy SEM, it is important to note that this conclusion is based on two key assumptions. Firstly, our peer group contains companies that are similar to SEM. If this isn’t the case, the difference in P/E could be due to other factors. For example, if you compared lower risk firms with SEM, then investors would naturally value it at a lower price since it is a riskier investment. The second assumption that must hold true is that the stocks we are comparing SEM to are fairly valued by the market. If this is violated, SEM’s P/E may be lower than its peers as they are actually overvalued by investors.
What this means for you:
Since you may have already conducted your due diligence on SEM, the undervaluation of the stock may mean it is a good time to top up on your current holdings. But at the end of the day, keep in mind that relative valuation relies heavily on critical assumptions I’ve outlined above. Remember that basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PE ratio is very one-dimensional. If you have not done so already, I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for SEM’s future growth? Take a look at our free research report of analyst consensus for SEM’s outlook.
Past Track Record: Has SEM been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of SEM’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
