Interest rates have jumped as the economy rebounds from the coronavirus pandemic. Old market leaders in the technology space have fallen behind as investors flock to new kinds of stocks like energy and financials. This raises questions for traders: Is the market overvalued? How do I find companies suited for the current environment? What valuation indicators matter?
While TradeStation’s platform is known for powerful technical analysis, many clients may not realize that it also has a wealth of fundamental data. This video provides a step-by-step demonstration of how to scan for a wide range of metrics like price/earnings, price/sales, price/book, growth indicators and more. It also explains how financial ratios vary widely between sectors and gives viewers concepts for applying the numbers based on market conditions. Viewers can access additional custom tools here.
What Is An Overvalued Stock?
An overvalued stock typically has higher multiples than its peers or industry group. This could be measured by P/E ratio, price/book ratio or price/sales. The key metrics vary by industry group, and may not apply between sectors. For example, price/sales is often used for software companies. Investors may compare banks and financials by their price/book ratios. Industrials and consumer staples are often assessed by P/E ratio.
It’s important to remember that stock market valuations are relative to other considerations like interest rates and the economic cycle. Companies often appear “cheap” at the end of an economic cycle and “expensive” when a recovery is starting.