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Mark Lin
Mark Lin
Articles (212) 

Professor Aswath Damodaran's Modified Low Price-to-Earnings Screen

November 13, 2012 | About:

Aswath Damodaran is a professor of finance at NYU Stern. He is the author of several widely used academic and practitioner texts on valuation, corporate finance and investment management and is regarded as an authority on valuation.

In Chapter 3 of his book "Investment Fables," he discusses low P/E stocks.He found limitations with the traditional P/E screen. First, there are many different definitions of the P/E ratio. The Forward P/E ratio uses forecasted earnings, while the current P/E and the trailing P/E ratios are calculated using historical earnings. Second, the low P/E reflects investors' perception of higher risk. Lastly, the market, as a discounter of all widely known information and future expectations, values low growth expectation stocks at a lower P/E ratio.

He suggested the following improvements to the traditional low P/E screen:

(1) P/E ratios (current, trailing and forward) less than 12

(2) Betas that are less than one

(3) Firms that had debt that exceeded 60% of their book capital were eliminated

(4) Expected growth in earnings per share greater than 5%

The following stocks passed the Damodaran Modified Low P/E Screen:

Stock SymbolCompany NameCurrent P/ETrailing P/EForward P/EExpected Growth Rate (%)
(NASDAQ:CPLA)CAPELLA EDUCATION COMPANY 8.4 9.8 10.2 11.8
(NASDAQ:CRWS)CROWN CRAFTS, INC. 11.5 10.7 10.1 18.0
(GGME)GAMESTOP CORP. 9.1 9.3 7.0 8.9
(NYSE:PMT)PENNYMAC MORTGAGE INVESTMENT TRUST 10.1 8.3 8.2 25.0
(NYSE:PRA)PROASSURANCE CORPORATION 9.4 8.6 11.0 8.3


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