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Flip it to See Stocks' Value

By, 10/14/2006

We think price-to-earnings ratios are pretty boring. Everyone uses them and they're poor predictors of future returns. They're not even all that great for comparing stocks to each other.

A novel thing to do with the humdrum P/E is flip it so it becomes an E/P ratio, commonly called an "earnings yield." Doing so suddenly gives us a powerful metric for assessing stock valuations. Creating an earnings yield gives you a more apples-to-apples method to compare the investment yield on stocks with other types of investments like bonds and cash.

Currently, earnings yields on stocks throughout the developed world and most major emerging markets offer tremendous relative value. The forward earnings yield on world equities is 3.31% higher than bonds!

We flipped out after flipping the P/E ratio and bought stocks. So should you.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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