ThinkFirst

Earnings Power vs. Investor Sentiment

There are a couple of serious problems with your analysis. Others have mentioned one problem, i.e. that consensus estimates by analysts may be under- or over-estimating true earnings power. The second problem is that there is no right way of overlaying earnings with price. Take Best Buy for example. If you move the earnings line up, you get a far different picture. The way you have drawn the lines, you are leading viewers to conclude that Best Buy is a sell because, at some point, the price has to come down to touch the earnings line. But, if the earnings line were drawn above the price line, somebody who viewed the graph would conclude that Best Buy is undervalued. Neither conclusion would be valid from a simple glance at the overlay chart. I hate to say this but, such simplistic analysis is practically worthless.