Right now, Wells Fargo Inc. WFC share price is at $27.77, after a 6.53% drop. Over the past month, the stock went up by 15.44%, but over the past year, it actually decreased by 39.08%. With questionable short-term performance like this, and great long-term performance, long-term shareholders might want to start looking into the company's price-to-earnings ratio.

The stock is currently higher from its 52 week low by 26.23%. Assuming that all other factors are held constant, this could present itself as an opportunity for investors trying to diversify their portfolio with Diversified Banks stocks, and capitalize on the lower share price observed over the year.

The P/E ratio measures the current share price to the company's earnings per share. It is used by long-term investors to analyze the company’s current performance against its past earnings, historical data and aggregate market data for the industry or the indices, such as S&P 500. A higher P/E indicates that investors expect the company to perform better in the future, and the stock is probably overvalued, but not necessarily. It also shows that investors are willing to pay a higher share price currently, because they expect the company to perform better in the upcoming quarters. This leads investors to also remain optimistic about rising dividends in the future.

Depending on the particular phase of a business cycle, some industries will perform better than others.

Wells Fargo Inc. has a lower P/E than the aggregate P/E of 17.94 of the Diversified Banks industry. Ideally, one might believe that they might perform worse than its peers, but it’s also probable that the stock is undervalued.

price to earnings ratio is not always a great indicator of the company's performance. Depending on the earnings makeup of a company, investors may not be able to attain key insights from trailing earnings.