Investing Commentary

Understanding the P/E Ratio as a Valuation

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There are always tons of great articles on seekingalpha, but one of my favorite authors is Chuck Carnevale, who also occasionally posts on Value Walk. He has a great article on seekingalpha about understanding how similar p/e ratios do not equal similar valuations.

This article is the second in a series of articles designed to elaborate on the proper utilization and understanding of the PE ratio as an important investing metric. Our first article in this series looked at how the PE ratio could be used to determine overvaluation. With this article we are going to review two companies where each is fairly valued and each has similar current PE ratios. Moreover, both companies offer yields above 3.5% which is greater than is available on the 30-year Treasury bond (current yield 30-year Treasury bond 3.02%).

Yet even with these similar attributes, almost identical PE ratios and above-average dividend yields, we intend to demonstrate how Darden Restaurants (DRI) offers a much higher potential future total return.

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