Overvalued? Undervalued?

Q:

I’m new to investing. How can I tell when a stock is overvalued or undervalued? — D.L., Venice, Fla.

A:

A company’s intrinsic value is to some degree a subjective number. Smart, experienced analysts who study the same company and perform calculations with fancy spreadsheets are likely to come up with results that are somewhat or even very different because they’ll be based on different assumptions and estimates. Even great investors will often disagree on the fair value of a stock.

Still, there are ways to get at least a rough idea of how attractive a stock’s price is. You might, for example, compare its current price-to-earnings (P/E) ratio with its historical P/E range over the past five to 10 years.

Pepsico, for example, was recently trading with a P/E near 30. A glance at its past ratios (available at Morningstar.com, among other sites) shows that its average P/E over the past five years is roughly 25. That suggests that Pepsico’s stock may be overvalued right now. Of course, there’s much more to the picture. Potential investors should assess Pepsico’s strengths, weaknesses and competitive advantages, along with its cash, debt, profit margins and growth rates, among other things.

There are other valuation measures to check out, too, such as price-to-sales ratios.

Q:

What’s the short-term tax rate for stocks? — F.W., Detroit

A:

The short-term capital gains tax rate is the same as your ordinary income tax rate, and it applies to stocks held for a year or less.

However, the long-term capital gains tax rate, for qualifying assets held at least a year and a day, is only 15 percent right now for many people. There’s talk of changing tax rates these days, too.