What does the blue normal P/E ratio line tell me?

2016-10-19

The blue normal P/E ratio line is telling you what valuation the market has normally applied to the stock for the period that you are graphing.  It does not necessarily indicate that the stock is fairly valued or undervalued, instead, it provides information regarding how the market had most commonly valued the stock over the timeframe being graphed.

It’s important to understand that the normal P/E ratio is a dynamic calculation that can, and will, change when different timeframes are graphed. Therefore, each time you change timeframes, be sure to check the blue FAST FACTS rectangle and note the multiple that the normal P/E ratio is being drawn at.

However, you need to understand that does not necessarily mean that the stock is fairly valued if it trades on that line.  In other words, it’s simply a piece of information telling you how the market normally prices the stock.  On cases when the normal P/E ratio (the blue line) is way above fair value, it represents an indication that the market normally applies a premium valuation, and vice-versa.

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