Like many investors, I was trying to see what was behind yesterday's 13% slide in shares of Chinese job-listings giant 51job
Was it the first whiffs of accounting-fraud allegations at another Chinese upstart? Was China's economy coming to a grinding halt? Were Steve Jobs haters simply shorting his name out of spite?
No, no, and of course, no.
Fellow Fool Cindy Johnson shared a cautionary note from Comtex News Network's SmartTrend, highlighting the five human-resources and employment-services providers with the chunkiest earnings multiples.
"A higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with a lower P/E ratio," the report explains.
I disagree. The point may be literally true, but I've seen cheap stocks with sky-high profit ratios and expensive stocks with single-digit multiples. A P/E ratio -- especially a trailing multiple -- can be flawed in so many ways. It disregards growth and near-term catalysts. Yes, it's a reasonable gauge for where a company has been, but it's certainly not a fair metric of where it's going.
The SmartTrend report addressed 51job, TrueBlue
Reality, though, paints an entirely different portrait.
This Year's P/E
Next Year's P/E
|Heidrick & Struggles||$20.44||18||14||Add|
|Robert Half International||$26.73||27||18||Add|
Source: Yahoo! Finance.
Did you catch the column with next year's earnings multiples? These five seemingly outrageously-priced stocks are all fetching 2012 P/E multiples in the teens.
How can a report with the word "trend" in the title -- syndicated through esimates tracker Zacks -- fail to delve into where each of these five employment enablers were heading?
This isn't the end of the story. Even the future profit targets may be underestimating what these companies will ultimately earn, hence overstating the P/E yardstick.
51job is coming off another monster quarter, with adjusted earnings soaring by 78%. Its online recruitment services saw a 58% spike in revenue.
51job competes with China Career Builder, Monster's
Over the past year, 51job has beaten Wall Street's bottom-line estimates by 9% to 90%, forcing analysts to jack up their projections (and thereby reducing 51job's forward earnings multiple). In other words, the real trend here would suggest that 51job is trading for quite a bit less than 19 times what it will ultimately earn next year.
So let misunderstandings and rearview perspectives create buying opportunities in a niche that isn't so insanely overpriced at all. At the end of the day, it's all about getting the job done right.
Do you rely on trailing or forward earnings multiples in your research? Share your thoughts in the comments box below.
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Longtime Fool contributor Rick Munarriz believes in Chinese growth stocks, but he owns no shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.