Advertisement
U.S. markets closed
  • S&P Futures

    5,304.25
    -4.00 (-0.08%)
     
  • Dow Futures

    40,140.00
    -36.00 (-0.09%)
     
  • Nasdaq Futures

    18,465.00
    -38.75 (-0.21%)
     
  • Russell 2000 Futures

    2,145.20
    +6.80 (+0.32%)
     
  • Crude Oil

    83.11
    -0.06 (-0.07%)
     
  • Gold

    2,254.80
    +16.40 (+0.73%)
     
  • Silver

    25.10
    +0.18 (+0.74%)
     
  • EUR/USD

    1.0790
    -0.0003 (-0.03%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • Vix

    13.01
    +0.23 (+1.80%)
     
  • GBP/USD

    1.2621
    -0.0001 (-0.01%)
     
  • USD/JPY

    151.3700
    -0.0020 (-0.00%)
     
  • Bitcoin USD

    70,691.46
    +998.82 (+1.43%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,366.29
    +198.22 (+0.49%)
     

Is PowerShares QQQ Trust Series 1’s (NASDAQ:QQQ) PE Ratio A Signal To Buy For Investors?

PowerShares QQQ Trust Series 1 (NASDAQ:QQQ) trades with a trailing P/E of 6.1x, which is lower than the industry average of 17.7x. Although some investors may jump to the conclusion that this is a great buying opportunity, understanding the assumptions behind the P/E ratio might change your mind. Today, I will explain what the P/E ratio is as well as what you should look out for when using it. View our latest analysis for PowerShares QQQ Trust Series 1

Breaking down the P/E ratio

NasdaqGM:QQQ PE PEG Gauge Jan 21st 18
NasdaqGM:QQQ PE PEG Gauge Jan 21st 18

P/E is often used for relative valuation since earnings power is a chief driver of investment value. It compares a stock’s price per share to the stock’s earnings per share. A more intuitive way of understanding the P/E ratio is to think of it as how much investors are paying for each dollar of the company’s earnings.

P/E Calculation for QQQ

Price-Earnings Ratio = Price per share ÷ Earnings per share

QQQ Price-Earnings Ratio = $166.34 ÷ $27.342 = 6.1x

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 preferably want to compare the stock’s P/E ratio to the average of companies that have similar features to QQQ, such as capital structure and profitability. A quick method of creating a peer group is to use companies in the same industry, which is what I will do. Since QQQ’s P/E of 6.1x is lower than its industry peers (17.7x), it means that investors are paying less than they should for each dollar of QQQ’s earnings. As such, our analysis shows that QQQ represents an under-priced stock.

Assumptions to be aware of

While our conclusion might prompt you to buy QQQ immediately, there are two important assumptions you should be aware of. The first is that our “similar companies” are actually similar to QQQ, or else the difference in P/E might be a result of other factors. For example, if you compared higher growth firms with QQQ, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price. The second assumption that must hold true is that the stocks we are comparing QQQ to are fairly valued by the market. If this does not hold, there is a possibility that QQQ’s P/E is lower because our peer group is overvalued by the market.

What this means for you:

Are you a shareholder? You may have already conducted fundamental analysis on the stock as a shareholder, so its current undervaluation could signal a good buying opportunity to increase your exposure to QQQ. Now that you understand the ins and outs of the PE metric, you should know to bear in mind its limitations before you make an investment decision.

Are you a potential investor? If QQQ has been on your watch list for a while, it is best you also consider its intrinsic valuation. Looking at PE on its own will not give you the full picture of the stock as an investment, so I suggest you should also look at other relative valuation metrics like EV/EBITDA or PEG.

PE is one aspect of your portfolio construction to consider when holding or entering into a stock. But it is certainly not the only factor. Take a look at our most recent infographic report on PowerShares QQQ Trust Series 1 for a more in-depth analysis of the stock to help you make a well-informed investment decision. Since we know a limitation of PE is it doesn’t properly account for growth, you can use our free platform to see my list of stocks with a high growth potential and see if their PE is still reasonable.


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.

Advertisement