John Lee’s Low PE criteria

mra77 · 7 April 2018 at 12:45PM

Hi all

Can someone help me understand the importance of a low PE when buying shares. John Lee in his book advocates buying shares with a single digit PE. Does that mean that if one does this, they then only top up their holding when the PE is still a single digit irrespective of the share price? Eg if the share price is less than their original purchase but the PE is higher then one wouldn’t buy to top-up. If one was to buy according to John Lee’s criteria then the likes of ‘safe’ shares like Unilever etc would be ruled out.

Legal and General certainly meets Lee’s criteria.

Is Lee’s low PE strategy mainly for those seeking to invest for growth?

Please could someone help me understand this concept?

Many thanks

System · 7 April 2018 at 12:59PM

https://www.investopedia.com/ask/answers/070214/how-can-pricetoearnings-pe-ratio-mislead-investors.asp

Linton · 7 April 2018 at 1:30PM

A low PE means the share is cheap for its profits. That can arise for different reasons:
1) The share really is cheap and the market hasnt noticed. So worth buying if you have sufficient confidence in your skills to conclude that the market is wrong.
2) There is a storm in sight or in progress but not yet represented in published profits, so avoid unless you feel lucky.
3) The company makes lots of profits but has minimal growth potential, eg utilities and similar. So could be of interest of to income investors or those unhappy with major risk.

One thing that a low PE probably doesnt mean is growth, unless (1) applies. Growth companies are more likely to be investing heavily to make profits in the future and to be higher priced because naive investors think that looking for potential Apples/Googles/Amazons is a good way to make money.

So I wouldnt recommend buying anything purely based on PE - you need to do a lot more research to understand why the PE is low. Or even better in my view, unless you have money that you dont mind losing, restrict your investing to funds.

Prism · 7 April 2018 at 1:35PM

mra77 wrote: »

Is Lee’s low PE strategy mainly for those seeking to invest for growth?

Please could someone help me understand this concept?

Its actually value investing rather than growth. Companies with a low PE are generally out of favour with other investors. They might have been though hard times, a scandal, their industry might be suffering etc. If you invest in a company with low PE it is typically because you expect it to recover in some form.

The difficulty with this kind of investing is you need to be very selective. Hard to say which companies will return to their heights, which ones will shrink out of existance and which will stay doing nothing.

Assuming you would buy these at a low price and then at some point everybody else gets interested, also buys in and the price goes up - at which point you sell and fidn another. Its a hard way to invest as you have to beat the market by somehow knowing more than everyone else or being lucky.

grey_gym_sock · 7 April 2018 at 4:25PM

i'd add that i think john lee is mainly buying smaller companies, which generally have lower PE ratios than big ones. to some extent, this is for a good reason - smaller companies tend to be less diversified, and less robust if things start to go wrong. but it is also a reason why smaller companies may be more rewarding for shareholders, if they are selective in which small companies they buy (i.e. not just everything with a low PE ratio) and diversify.

John Lee’s Low PE criteria

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