Hi all,

This is my first post after some time spent reading this great forum.

I've decided to register and make some questions to people more expert than me on financial matters.

I would like to play Maths with stocks, but not in terms of Moving Averages et simila, but working on fundamentals, instead.

First question is related to the Price-to-Earnings ratio, P/E. It can be calculated on past performance or future expectations.

P/E = Price / Earnings per share

Price = $540.67

EPS = $39.75

P/E = 540.67 / 39.75 =13.6

A P/E of 13.6 seems a bargain for a big company like Apple.

Question 1: Would you agree on the above statement?

Question 2: How you pick stocks based on P/E ratios?

The P/E/G ratio is similar but takes into account the growth rate estimated for the next 5 years.

P/E/G = Price to earnings ratio / growth rate next 5 years

P/E = 13.60

Growth rate for EPS in next 5 years = +12.10%

P/E/G = 13.60 / 12.10 =1.12

When referring to EPS in next 5 years, it seems that Apple isn't a good buy. P/E is bigger than growth, meaning it is overvalued.

Question 3: would you agree with the above statement?

If the above outcome seems unfair for Apple, let's what happens if we refer to the past performance (+41.52%):

13.60 / 41.52 = 0.33

In this case, if we refer to past performances of growth rate, the actual P/E seems to be a great bargain.

Question 4: would you agree with the above statement?

Next analysis is related to regarding the stock price as the discounted value of expected future dividends, that is:

P = D / K

Where:

P = Current stock price;

D = Current dividend rate;

K = Required rate of return.

We get:

D = $3.05 (declared on 28th of October 2013)

K = 10%

P = 3.05 / 0.10 = $30.50

Now, to get a decent return based on future dividends, the fair price for Apple should be $30.50. In terms of dividends, Apple is 17.7 times overvalued.

Question 5: would you agree with the above statement?

The return rate I get from Apple in terms of dividends is:

K = 3.05 / 540.67 = 0.6%

The return I get from dividends investing in Apple is an absolute "stay away".

Question 6: would you agree with the above statement?

The last analysis is fair for a no-growth company that gives satisfactions to its shareholders through dividends, but Apple is a growth-company, even a fast-growing one if we refer to past performance. Something different should be used, in this case:

P = D / (K - g)

Where:

P = Current stock price;

D = Current dividend rate;

K = Required rate of return;

g = growth rate in earning per share = 9.50% (estimates for next year)

We get:

P = 3.05 / (0.10 - 0.0.95) =$610.00

If we take into account the growth rate in earning per share, a fair price for Apple would be $610.0 versus the actual $540.67. In these terms, the actual stock price is slightly underestimated.

Question 7: would you agree with the above statement?

Let's stop here to avoid to make it too long.

You can decide to answer also to just some of the above 7 questions.

Best regards,

OFS

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