The Wrong Way to Analyze Companies in an Industry

Poor use of price-earnings ratios by both amateurs
and professionals alike is to evaluate the stocks in an industry and conclude
that the one selling at the cheapest P/E is always undervalued
and is therefore, the most attractive purchase. This is usually the company
with the most ghastly earnings record, and that's precisely why it
sells at the lowest P/E.
The simple truth is that stocks at any one time usually sell near their
current value. So the stock which sells at 20 times earnings is there for
one set of reasons, and the stock that trades for 15 times earnings is
there for other reasons the market already has analyzed. The one selling
for seven times is at seven times because its overall record is more
deficient. Everything sells for about what it is worth at the time.
If a company's price level and price-earnings ratio changes in the
near future, it is because conditions, events, psychology, and earnings
continue to improve or suddenly start to deteriorate as the weeks and
months pass.
Eventually a stock's P/E will reach its ultimate high point, but this
normally is because the general market averages are peaking and starting
an important decline, or the stock definitely is beginning to lose its
earnings growth.
High P/E stocks can be more volatile, particularly if they are in the
high-tech area. The price of a high P/E stock can also get temporarily
ahead of itself, but so can the price of low P/E stocks.