P/E Ratio Reliability
by Hugh Stokely and Ken Stewart
Alert traders can do well in financial instruments, but short-term trading usually averages out close to
a zero-sum game — that is, a dollar won tends to come directly out of the pocket of a less alert trader or
Finding positive-sum games—those in which everyone wins — can improve the odds. Historically,
growth stocks have provided a "positive sum" — a growing investment pie that rewards the winner of a
trade extremely well but also allows the loser to build investment value over time.
Even in quick-response trading, a case exists for fishing in a pond of seasoned growth stocks that have
strong underlying company and market characteristics. A low-capitalization, less seasoned stock is
particularly vulnerable to random shocks that override fundamental and technical logic. Often, a seasoned
stock is a better bet to reflect the factor that attracted the trader's attention to begin with. Because
volatility is inherent in equities and derivatives, there are significant opportunities for trading and
combination strategies in seasoned growth stocks.
Growth stocks increase in value by exploiting longer-term fundamental trends. Over time, effective
managers incorporate improvements in technology into the company infrastructure, thus creating
marketing advantages that build profit margins and earnings. For companies categorized as growth
stocks, superior earnings performance can be amplified by expanding price/earnings multiples.