On occasion, I will write a post that is especially directed to readers of my book.  This is one of those posts.

My book teaches how to screen for potential stock purchase candidates from the universe of publicly traded companies and then how to analyze the stock purchase candidates further for quality and a low buying price.

With regard to screening for stock purchase candidates, Chapter 10 of the book details several screening filters I follow when I’m trying to cull out quality stocks trading at low prices from the universe of publicly-traded stocks.  Among the filters is a price to earnings (P/E) filter. By the way, the P/E ratio reflects the relationship of the price that the stock currently trades at on the market to the earnings per share of the company for the past twelve months of reported earnings activity.

The higher the P/E, the higher the stock is being priced by the market relative to the earnings performance of the company.  I explain, in the book, that it is okay to relax the P/E filter to less than 20 from my personal typical filter choice of less than 15.  The point of this post is to go further and say that the P/E filter can be relaxed even more without altering my buying strategy.

I include a P/E filter, among my other six filters, when I’m screening for potential stock purchase candidates because I do want the companies I buy to be making money, not losing it.  When the market has been undergoing a bullish run and establishing new all-time highs, as we’ve witnessed recently (just before the government shutdown), relaxing the P/E filter may become necessary to increase your pool of potentially low-priced stocks for further analysis.  That’s because stock prices are generally higher and, in turn, so are stock P/E ratios.  I probably would not relax the P/E ratio beyond less than 30.

You will have to read my book to fully understand why relaxing the P/E ratio does not alter my buying formula. Let me just say that my buying approach is driven primarily by the cheapness of a stock price relative to the company balance sheet and not relative to the company earnings statement.  The P/E relates the stock price to the earnings of the company, not to the balance sheet.