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Chapter 2. Trend Discovery: Finding the ... > A Four-Part Approach to Analysis

A Four-Part Approach to Analysis

The difficulty in using PE ratio to quantify market perception is based on our inability to know how seriously core earnings affect that perception. The day will come when such adjustments will be the norm. For now, we can make the best use of PE by making comparisons between companies in the same industry and by applying core PE to better understand how market price is affected by the core-based fundamentals.

The analysis of Sears makes the point that core earnings adjustments may have a lot to do with price volatility. It further points out that a more detailed analysis often reveals the causes for market trends and also reveals a lot about potential long-term growth. In the example in the previous section, Sears carries a heavy long-term debt load; its sales and profits are declining; and it has substantial core earnings adjustments. (If the exercise price of employee stock options had been lower than Sears's stock price, these core earnings adjustments would have been even greater.)


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