Unfortunately for some shareholders, the Sandstorm Gold (TSE:SSL) share price has dived 35% in the last thirty days. The recent drop has obliterated the annual return, with the share price now down 21% over that longer period.
Assuming nothing else has changed, a lower share price makes a stock more attractive to potential buyers. 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). The implication here is that long term investors have an opportunity when expectations of a company are too low. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.
Does Sandstorm Gold Have A Relatively High Or Low P/E For Its Industry?
We can tell from its P/E ratio of 46.34 that there is some investor optimism about Sandstorm Gold. You can see in the image below that the average P/E (11.2) for companies in the metals and mining industry is a lot lower than Sandstorm Gold's P/E.
Sandstorm Gold's P/E tells us that market participants think the company will perform better than its industry peers, going forward. Clearly the market expects growth, but it isn't guaranteed. So investors should delve deeper. I like to check if company insiders have been buying or selling.
How Growth Rates Impact P/E Ratios
If earnings fall then in the future the 'E' will be lower. That means unless the share price falls, the P/E will increase in a few years. So while a stock may look cheap based on past earnings, it could be expensive based on future earnings.
In the last year, Sandstorm Gold grew EPS like Taylor Swift grew her fan base back in 2010; the 188% gain was both fast and well deserved. Regrettably, the longer term performance is poor, with EPS down 2.0% per year over 5 years.
Remember: P/E Ratios Don't Consider The Balance Sheet
It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.
While growth expenditure doesn't always pay off, the point is that it is a good option to have; but one that the P/E ratio ignores.
Is Debt Impacting Sandstorm Gold's P/E?
Sandstorm Gold's net debt is 3.6% of its market cap. The market might award it a higher P/E ratio if it had net cash, but its unlikely this low level of net borrowing is having a big impact on the P/E multiple.
The Verdict On Sandstorm Gold's P/E Ratio
Sandstorm Gold's P/E is 46.3 which is way above average (11.6) in its market. While the company does use modest debt, its recent earnings growth is superb. So to be frank we are not surprised it has a high P/E ratio. What can be absolutely certain is that the market has become significantly less optimistic about Sandstorm Gold over the last month, with the P/E ratio falling from 71.1 back then to 46.3 today. For those who prefer to invest with the flow of momentum, that might be a bad sign, but for a contrarian, it may signal opportunity.
When the market is wrong about a stock, it gives savvy investors an opportunity. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free report on the analyst consensus forecasts could help you make a master move on this stock.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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