Are P-E's Past Their Prime?

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"I've never found p-e ratios to be a particularly good screen for me," says John Wilson, chief technical strategist at Morgan Keegan. After all, the stocks that do the best in the stock market are those that beat their earnings estimates, he says. Some of the best-performing stocks can have higher p-e ratios, reflecting their better growth prospects.

Brian Gendreau, investment strategist at ING Investment Management, says p-e ratios are "a very strong and powerful indicator." He adds, though, that p-e's are not a good way of predicting the near future. "Sometimes, the market is cheap because growth prospects are not very good," Gendreau says. "If valuations are inexpensive, they can stay that way for quite a while."

For example, energy stocks tend to have low p-e's—with the average under 10—because, despite rapid growth from this sector, most investors assume huge profits won't be sustainable when energy prices cool off.

"Just because something is cheap doesn't mean it's a bargain," Reynolds says.

Guiding the Long View

Still, p-e's can be a good guide for investors with a long time horizon. In the past, periods where stocks have low p-e's have been great times to invest, as long as you're not eager for quick returns.

While valuations are cheap, the broader stock market's recent momentum is "dreadful," Gendreau says. But, he says, p-e's demonstrate that stocks should eventually recover—perhaps in a year to 18 months.

"If you've got a two- or three-year time horizon, this is an excellent time to buy," Merrill says.

The concern of many on Wall Street is what happens to prices, earnings, and p-e's over the next year. More financial troubles and an economic slowdown could prove that today's p-e ratios are appropriate or even overly optimistic. But for individual investors with the stomachs to handle a wild ride, p-e's say this might be a good time to buy.

Steverman is a reporter for BusinessWeek's Investing channel.