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To the annoyance of some shareholders, Peyto Exploration & Development (TSE:PEY) shares are down a considerable 31% in the last month. And that drop will have no doubt have some shareholders concerned that the 78% share price decline, over the last year, has turned them into bagholders. What is a bagholder? It is a shareholder who has suffered a bad loss, but continues to hold indefinitely, without questioning their reasons for holding, even as the losses grow greater.
All else being equal, a share price drop should make a stock more attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). So, on certain occasions, long term focussed investors try to take advantage of pessimistic expectations to buy shares at a better price. Perhaps the simplest way to get a read on investors' expectations of a business is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.
Check out our latest analysis for Peyto Exploration & Development
Does Peyto Exploration & Development Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 2.52 that sentiment around Peyto Exploration & Development isn't particularly high. If you look at the image below, you can see Peyto Exploration & Development has a lower P/E than the average (8.3) in the oil and gas industry classification.
Its relatively low P/E ratio indicates that Peyto Exploration & Development shareholders think it will struggle to do as well as other companies in its industry classification. Since the market seems unimpressed with Peyto Exploration & Development, it's quite possible it could surprise on the upside. If you consider the stock interesting, further research is recommended. For example, I often monitor director buying and selling.
How Growth Rates Impact P/E Ratios
Earnings growth rates have a big influence on P/E ratios. That's because companies that grow earnings per share quickly will rapidly increase the 'E' in the equation. Therefore, even if you pay a high multiple of earnings now, that multiple will become lower in the future. And as that P/E ratio drops, the company will look cheap, unless its share price increases.
Peyto Exploration & Development maintained roughly steady earnings over the last twelve months. But it has grown its earnings per share by 8.7% per year over the last three years. And it has shrunk its earnings per share by 3.7% per year over the last five years. So you wouldn't expect a very high P/E.