Can Investing Based On Low PER Fail?

Everyone loves to talk about what works in investing.

Investing based on low price earnings (PE) multiples and investing based on dividend yields.

For some, this is the holy grail in investing. You cannot say anything negative about such strategies.

Ask me, I know. I was asked for my opinion twice recently. I posted Investing In A Stock For Its Dividend Yields and Some Opinions. And needless to say, no thanks to the mind less open, things became pointless as such simple investing chat became an issue of English Lessons or should I say Hokkien lessons! LOL! Exactly! Hokkien!

Look for sure many could point out that investing in a stock for its dividend yield could work, as illustrated by myself on the postings Investing In A Stock For Its Dividend Yields II and Investing In A Stock For Its Dividend Yields III. Investing for the dividend DOES work handsomely! However, as mentioned in the original posting, Investing In A Stock For Its Dividend Yields, I have showed a very simple example where such an investing failed big time.

So why is such a big issue?

Come on, this is not a posting of whose is bigger or longer. Nah, it's not about my one is better than your one.

So what am I saying here? One minute cannot and the next minute cannot! Why so complicated?

My point again? LOL! Pardon my lazy bones but do allow my fingers to do another paste job.

• Simple. I am not saying such an investing would not work and I am pretty sure many could provide me with full data where investing a stock for its dividends are proven successful. However, all I am saying is the investor should be careful. There are many incidents where such an investing can fail! The sustainability of the company's earnings is just as important. The reasoning is simple, without sustained earnings for the company, how could the company afford to continue paying so much dividends?

And needless to say the bad mouth will come and harp on the broken tape recorder being played over and over again. Some will even resort to name callings too, yes? Utterly no class.

Hey, last I remembered this is a blog.

Anyway, let's talk low PE.

Utter silence. Huh? Are you sure? Aren't you afraid of the countless and pointless comments you have been receiving lately. Nah. Why should I?

All I did was highlight several cases. Do I advocate which method to use and what not to use? All I said was to be careful. And this is exactly what I will say too for low PE investing.

Yes, needless to say, it's ideal to invest in a stock that is trading in a price which is low in comparison to its earnings. This is what low PE investing is all about.

But hang on a minute. The stock in question has to be the right stock and needless to say, the E in the PE equation is never a constant too. Think about it.

Buy the wrong stock and the investing could also fail. Buy the right stock but if the earnings is cyclical and the earnings fall, the investing could also fail.

All talk no example?

I do have plenty but I will just share one. Back on 20th October 2005, I wrote the following Megan. Pardon my lazy fingers once again while it do a paste job.

• For those that know me would realise that I am extremely prejudiced against Megan Media for as I view it as an unreal potential investment trap. Why an investment trap? Yes, Megan reported earnings does looks interesting given its current traded share price (rm 1.04) but there are just simply too many faults within the company’s fundamentals.

Here is a snapshot of a RHB article written back in Sept 2005.

And my fingers doing some paste job from that report.

• Megan’s low single-digit prospective PERs (or fully diluted PERs of 3-5x on effect of ESOS) are in line with its global peers and reflected the operational risks (associated with Megan’s small market share globally and its high borrowings). Hence, we are maintaining our MARKET PERFORM rating on Megan.
  Indicative fair value is pegged at RM1.38/share, based on 4x FY2006 EPS.

Fully diluted PER of only 3-5x!

How? Could an investment based purely on low PER work?

Yeah, we all know the answer. Megan Media turned out to be one of the biggest : Accounting Fraud in our market and investors buying Megan based on a low PER would have crashed and burned!

How?

Again, I am not saying investing based on low PER would not work. I am sure many will be proud to show me where it works like a charm too! :D

All I am saying is there are cases where it could fail. That's all. And this is based on past facts.