Editor’s Note: Liz Peek is a financial columnist and the author of wowOwow’s Wall Street Weekly. Liz Peek’s SHEconomics series, herewith, is scheduled to become a book. Click here for your introduction.

wOw women are smart cookies, and for sure they are good shoppers. So, when they see a “50% off” sale, they are tempted to buy. The question is: Should you buy stocks the way you buy cashmere sweaters?

The answer is: maybe. If a company’s stock has been cut in half and the basic operating outlook for the company is unchanged, then it may well be a compelling buy. Unfortunately, that is not usually the case. Today, the miserable economy has mucked up the outlook for most corporations. Consequently, analysts are trying to sort out companies’ prospects in this brave new world, to determine where stocks should sell. They are, in fact, trying to answer the questions on everyone’s minds: Is it too early to buy? What is a stock really worth? Are we there yet?

These are the questions that can make us all crazy, because of course there are no firm answers. However, there are benchmarks   – generally accepted guideposts to valuing stocks that keep the pros from losing their marbles at times like this.

I’ve been reading some of the letters that professional money managers send out to clients to let them know how things are going (badly) and how they see the future (murkily). For all their vagueness (I am dying for someone to tell me: this is absolutely how all this mess is going to sort itself out), these communications are quite comforting. Their messages reassure me that the grown-ups among us think we will survive this calamity. Moreover, some see value in today’s downtrodden share prices. 

How do these pros approach valuing stocks? The most common method is to compare share prices to earnings, described by the so-called P/E ratio. A company whose stock is selling at $100 and that is expected to earn $10 this year is said to be selling at ten times this year’s estimate. If the company made $5 per share over the past four quarters, the stock is selling at 20 times, “trailing 12 months’ earnings.” Simple, right?

Of course, life is hardly ever so straightforward. For instance, what if a company made money from operations last year but, like Citigroup, wiped away all its income with write-downs? Then you can talk about a P/E based on operating earnings or one based on “as reported” earnings, which would include the one-time charges. 

What if a company is losing money, like General Motors? How can you value a company that has no earnings? In this case an analyst might look at book value, or the value of net assets on the company’s books, divided by the number of shares outstanding. In the case of a company like General Motors, you might try to figure out what the company might earn on its assets in a better economy, using a more typical car sales figure as a starting point. You would describe that projection as “normalized” earnings, and try to price the stock on that. If for various reasons (and in GM’s case there are many) the company is unlikely to turn a profit anytime soon, you could also look at cash flow, or that amount of money the company is bringing in before deducting non-cash charges such as depreciation of its plant.