A participant asked me why shouldn’t we buy companies with PE as low as possible. In the extreme case, the PE can be as low as 3. Why should we picked it up? Remember this: PE of that extreme low is that low for a reason. In a normal environment whereby there is no systemic meltdown, It is likely that the company is exposed to some huge risks and investors find it difficult to stomach this risk and decide to sell their shares. For example, a company was originally trading at $1.50 and the EPS was $0.10, giving it a PE of 15. Suppose, the company decides to go into an extremely ‘risky business’ and investors are not happy with the strategy, and everyone sells in concert, the share price can plunge from $1.50 to perhaps $0.30. Maybe, you suddenly discover this stock when the PE is now trading at 3 thinking that it is a good buy, you may be in for some unwarranted risk. Yes, you are buying cheaper than those who bought at $1.50, but buying at $0,30 does not mean that the share price cannot tank further to $0.20 or even $0.10 or even below that. In October 2013, Asiasons, Blumont and LionGold stocks plunged more than 80%, within two trading days 4th & 7th. If investors start to pick up shares on 7th Oct at that time, they are in for trouble. By today, these stocks have tanked further by another 90% or more after 7th October 2013. The price of Asiasons Capital, Blumont and LionGold closed at $0.02, $0.01 and $0.015 respectively. Those who take this opportunistic approach to buy such ‘bomb-out’ counters are taking a gamble, not investing. I wish them luck.
Brennen Pak has been a stock investor for more than 25 years. He is the principal trainer for BP Wealth Learning centre LLP. He is the author of the book “Building Wealth Together Through Stocks.”