WITH MAJOR STOCK averages up more than 25 percent this year, many investors wonder whether to buy stocks with high price-earnings (P/E) ratios or low P/Es.
Most studies favor a low P/E strategy. (A P/E ratio is the relationship between a stock's price and its underlying earnings per share.) Recent conclusions:
CLEAR WINNERS: "Low P/E stocks beat high P/Es, says a 1963-1993 NYSE study. Every dollar invested in highest P/E stocks grew to $20 vs. $120 in lowest-P/Es, a 6-to-1 advantage." (Fortune, Oct. 16.)
INCOME HELPED: "A 1970-1995 study found that lowest P/E stocks gained 18 percent a year vs. highest P/Es, which grew 9 percent. Low P/E stocks' higher dividends helped their total return." (Forbes, Nov. 6.)
FOR EXAMPLE: Here are some low P/E stocks, followed by current P/E ratios: Amoco, 14; BGE, 12; Bell Atlantic, 16; Ford, 6; Reynolds Metals, 8; and Citicorp, 9.
Some well-known high P/E issues: Coca-Cola, 32; Disney, 22; General Electric, 20; Gillette, 28; Merck, 23; and Microsoft, 36.
BEAR TRACKS: Here's how to "bear-proof" your portfolio in this "bull" market: (1) Sell half your holdings of stocks with big gains, having your cake and eating it, too. (2) Place "stop-loss" orders for protection if your stock plunges. (3) Only invest if there is little downside risk. (See P/E studies above.) (4) Diversify by buying bonds.
THRIFTY TRIO: Interviewed in the December issue of Money, a couple shares its "Smartest Money Moves To Make," as follows: "(1) We cut up our credit cards, paid off our debt, then worked out a monthly payment schedule. (2) Instead of buying, we rented our first home with an option to buy. (3) We raised auto and homeowners insurance deductibles, saving $400 a year."
LOWEST RATES: To find lowest mortgage rates, call HSH Associates at 1-800-873-2837. The firm offers a $20 Homebuyer's Mortgage Kit, which includes mortgage options and a booklet to familiarize buyers with the choices.
BUSINESS BRIEFS: "In raising capital, increase your odds enormously by going to people who understand your product and your industry." (Success, November.)
"When people argue on opposite sides of a table, they appear as adversaries. Better: Sit next to each other, emphasizing side-by-side efforts to solve a problem." (Working Families, November.)
PLANNER PICKING: To select a financial planner: (1) Ask friends whom they use. (2) Ask lawyers, bankers, trust officers for recommendations. (3) Get referrals from International Association for Financial Planning, 1-800-945-4237, or the Institute of Certified Financial Planners, 1-800-282-7526. (4) Make sure planner is registered with the SEC.
LOOKING BACK: Jeff Lyons sends pages from his uncle's 1950 notebook: "He wrote down everything he spent money on, to see where fat could be trimmed." Items: a pound of coffee, 33 cents; a haircut, 60 cents; cigarettes, 20 cents a pack; a tank of gasoline, $4; bowling, $1 a game; Christmas gift, 25 cents; pie, 15 cents; gas and electric bill, $8.95.
LOOKING AHEAD: Tonight, "Wall Street Week" celebrates its 25th anniversary, live from New York. When we started, Friday, Nov. 20, 1970, the Dow Jones average stood at 761.57.
BGE stock is listed under "Above-Average Yields From Secure Dividends," in S&P; Outlook, Nov. 15. ("Will reward long-term holders with periodic dividend hikes.")
USF&G; appears on Legg Mason's "Recommended Buy List." Gerald Scheinker, 486-8010, will send a copy.
"Middle Management Isn't Down or Out: Managers Flourish Despite Layoffs," is an encouraging story in the Nov. 12-18 issue of National Business Employment Weekly.
"Here's what the Fed has in reserve: An interest-rate cut for the New Year." (Smart Money, December.)
"Stocks can work higher, but not by enough to make buying them anything other than 'greater-fool' brinkmanship." (Kennedy Gammage.)
"High level of 'short-selling' is positive. There's a high pessimism level, and short sellers will have to buy back stock." (Klipp Investment Letter.)
"In 12-18 months, we'll start a full-fledged bear market cycle. Rising interest rates will topple this historic bull run." (Yamamoto Forecast.)