This strategy looks at relative industry strength. The lowest P/E companies within an industry regardless of how high or low the general price of the industry group.
The advantage of this strategy is that buying the lowest values stocks in each major industry opens a much larger investment universe than just using strategy #1.
The relative industry method can be used with the entire market. The relative contrarian strategy has more diversification by industry than strategy #1. Looks for companies that have greater than 20% discount to its peers.
Also used are the Low P/CF (Price relative to Cash Flow), P/BV ( Price relative to Book Value), and P/D (Price relative to Dividend) ratios .
Essentially this strategy buys solid companies that are currently out of favour as measured by their low price to earnings, price to cash flow and price to book value.
Most expensive within an industry (i.e. companies to avoid)
- High PE
- High P/CF
- High P/BV
- High P/D
Least Expensive within an industry (i.e. companies to investigate)
- Low PE
- Low P/CF
- Low P/BV
- Low P/D
Positive earning surprises have a positive benefit to low P/E stocks and generally a neutral influence on high P/E stocks.
Negative earning surprises have less effect on low P/E stocks than on high flying P/E stocks.