Yahoo Finance Is It Time To Sell The Howard Hughes Corporation (NYSE:HHC) Based Off Its PE Ratio?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to begin learning the link between The Howard Hughes Corporation (NYSE:HHC)’s fundamentals and stock market performance.
The Howard Hughes Corporation (NYSE:HHC) is currently trading at a trailing P/E of 34.2x, which is higher than the industry average of 9.2x. Although some investors may jump to the conclusion that you should avoid the stock or sell if you own it, understanding the assumptions behind the P/E ratio might change your mind. In this article, I will deconstruct the P/E ratio and highlight what you need to be careful of when using the P/E ratio. See our latest analysis for Howard Hughes
Breaking down the Price-Earnings ratio
P/E is a popular ratio used for 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 HHC
Price-Earnings Ratio = Price per share ÷ Earnings per share
HHC Price-Earnings Ratio = $133.05 ÷ $3.895 = 34.2x
The P/E ratio isn’t a metric you view in isolation and only becomes useful when you compare it against other similar companies. We want to compare the stock’s P/E ratio to the average of companies that have similar characteristics as HHC, such as size and country of operation. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. At 34.2x, HHC’s P/E is higher than its industry peers (9.2x). This implies that investors are overvaluing each dollar of HHC’s earnings. As such, our analysis shows that HHC represents an over-priced stock.
Assumptions to watch out for
Before you jump to the conclusion that HHC should be banished from your portfolio, it is important to realise that our conclusion rests on two assertions. Firstly, our peer group contains companies that are similar to HHC. 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 HHC, 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 HHC to are fairly valued by the market. If this does not hold, there is a possibility that HHC’s P/E is lower because our peer group is overvalued by the market.
What this means for you:
If your personal research into the stock confirms what the P/E ratio is telling you, it might be a good time to rebalance your portfolio and reduce your holdings in HHC. But keep in mind that the usefulness of relative valuation depends on whether you are comfortable with making the assumptions I mentioned 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 urge you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for HHC’s future growth? Take a look at our free research report of analyst consensus for HHC’s outlook.
Past Track Record: Has HHC 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 HHC’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.