Ask the Fool

Lower is better

Q: Is it better for a company’s forward price-to-earnings (P/E) ratio to be higher or lower than its current P/E ratio?

A: Lower is generally better. The current P/E ratio is the company’s current stock price divided by its earnings per share (EPS) for the trailing 12 months — so it’s backward-looking. The forward, or projected, P/E ratio divides the stock price by next year’s estimated EPS.

When the forward P/E ratio is lower than the current one, it reflects that earnings are expected to rise. For example, if the Whoa, Nellie Brake Co. (ticker: HALTT) is trading at $60 per share with EPS over the past year of $3, its P/E would be 60 divided by 3, or 20. If it’s expected to generate $4 in EPS next year, its forward P/E would be 60 divided by 4, or 15.

A lower forward P/E is promising, but it might just be due to unusually low earnings in the past year. And earnings estimates sometimes turn out to be wrong. Never make any investment decision based on just one measure, or even just a few.

Q: How does one begin researching a company?

A: Call and ask its Investor Relations department to send you an “investor’s package,” which should feature the latest annual and quarterly reports and usually more.

Better still, gather that information — and more — online, starting with the company’s website. Most major companies have very informative websites; check out sections with labels like “About Us,” “For Investors” and “News.”


Presentations made by executives can be very informative. You can also look up news reports and articles using Google Search and Google News.

My Smartest investment

A financial dead weight

My smartest financial move was prepaying about 4% of the value of my home loan. This reduced my loan-to-value ratio enough to drop the private mortgage insurance (PMI) my lender had required me to carry. Since PMI isn’t even deductible, it was a financial dead weight. Good riddance! — U.L.

The Fool responds: Homebuyers are generally required to carry PMI when they buy a home with less than a 20% down payment. That 20% can be a hefty sum — it’s $50,000 if you’re buying a $250,000 home — so it’s common for borrowers to pay for PMI along with their regular mortgage payments.

As you make payments over time and build equity in your home, your loan-to-value ratio will drop, and once the principal you owe drops to 80% of the home’s value, you can ask your lender to cancel the PMI. To maximize your chances of getting it canceled, make your payments on time. (Even if you don’t get around to asking, once your loan-to-value ratio hits 78%, if you’re current on your payments, your lender will be required to cancel it.)

Making extra payments against principal on your mortgage is often a great idea, as just an extra payment or two per year can shave many years off the life of your loan.

The Motley Fool Take

Gushing about Chevron

2019 has been another tough year for oil producers, which are dependent on oil prices. A rally early in the year gave way to a decline, as fears over a slowing global economy caused oil prices to retreat — taking many oil stocks with them. Integrated oil major Chevron (NYSE: CVX) is one energy stock that has taken a beating, yet has barely skipped a beat.


Oil prices are down a bit from their spring 2019 highs, and Chevron’s revenue is down 8% over the last 12-month stretch, but its free cash flow has remained relatively stable. The company is financially solid, with relatively little debt — indeed, it has plenty of room on its balance sheet to add debt if an industry downturn requires it.

Chevron looks well-positioned in the oil industry, with relatively low costs, growing production and a strong enough balance sheet to handle adversity. Of course, oil and natural gas are carbon-based fuels that are expected to be displaced over time by cleaner alternatives, like electricity generated by solar and wind — though that won’t happen suddenly. Right now, the world still needs oil and gas — in large quantities.

Long-term investors looking for a reliable dividend stock should consider Chevron. It isn’t a risk-free investment, but its dividend yield (recently 4%) is attractive, and the dividend continues to grow. This seems a good time to consider adding Chevron to your dividend portfolio.