According to the Wall St Journal selloffs are a great time to look for bargains—with one caveat: They make all stocks look cheap, increasing the risk that your bargain is really an overpriced bust. That's even more true after Monday's market rout.
Stocks, of course, are cheaper than they have been since September 2010: The Dow Jones Industrial Average has dropped about 16.4% since peaking in April, while the Standard & Poor's 500-stock index has dropped about 18.3% since its peak. Valuations are cheaper than they have been all year: The S&P 500's price/earnings ratio, which is calculated y dividing the current market price by the total profits of the companies in the index, is currently about 10.07, based on 2012 earnings estimates.
One month ago it was over 12.
Yet the uncertainty about the economic environment makes it difficult to trust those valuation numbers. Part of the problem is that most widely cited measures of P/E are based either on analyst forecasts, which tend to be overoptimistic, or the previous 12 months' profits, which have been particularly good times for company earnings.
Right now, analysts expect the companies in the S&P 500 to earn $114 per share in 2012...
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Find out more at http://online.wsj.com/article/SB10001424053111904480904576496723983643948.html?mod=personal_fin_newsreel
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