One is a value created using some type of cash flow, sales or fundamental earnings analysis. The other value is dictated by how much an investor is willing to pay for a particular share of stock and by how much other investors are willing to sell a stock for in other words, by supply and demand. Both of these values change over time as investors change the way they analyze stocks and as they become more or less confident in the future of stocks. Let me discuss both types of valuations.
How is the expected growth calculated? Only EPS growth is relevant, but no analysts use that metric. It is reasonable to use the same period eg 5 years of growth for all comparisons, but doing so will penalize companies with growth expected to last longer.
What initial Earnings value is used, the ttm earning per share, or the estimated future earnings, or the normalized operating earnings? Using forward earnings will double count growth, but that is the normal metric used.
Where does the growth rate estimate come from? Every website posts consensus estimates, but those have been shown to be overly optimistic.
This metric generates more underpriced stocks when interest rates are high, and also more stocks from emerging markets because their interest rates are higher.
A high interest rate creates a high opportunity cost for stocks and lowers their price. The lower price even while growth rates are the same creates a lower PEG.
The metric is most relevant when used as a comparative metric between stocks. Economic realities will impact what PEG is acceptable, same as they impact PE - the risk in the economy, interest rates, inflation, etc.
PEG ignores differences in stocks' price volatility. If you sort stocks by price volatility there is a direct correlation between high risk and low PEG. Very few companies trade have traded at that low multiple for many decades. Growth is only part of the return to investors.
Dividends are the other part. Shiller has gone to great lengths of data mining. He eventually found an explanatory pattern between a the ratio of the index's price to its year-historical-average earnings PE10and b the futureyear's real returns.
The explanatory powers of PE10 increase as you lengthen the subsequent period to 20 years. But PE10 has little explanatory power for shorter 5-year returns and no one in real life makes investing decisions based on a promise that take 10 years to materialize.
It seems clear from his results that using averaged historical earnings is useful in valuations. Pretty much what common sense would tell you. Pretty much what people do anyway. The power of the PE10 to explain real-returns varies over time, and between markets.
Klement studies 35 countries' PE10 over the previous recent history for which data is available and found widely varying explanatory powers. In Canada since PE10 has explained only 11 percent of returns, while Ireland's PE10 since has explained 90 percent.
This may be because different markets show different cyclicality of returns - US stock returns are very cyclical, while Canadian stock returns are not. The metric predicts the next phase of the cycle - so there must be a cycle for it to work.
Just because it was cyclical in the past? But PE10 may have a place in retirement planning. The portfolio returns in the first 10 years after retirement have a huge impact on your probability of eventually running out of money.
If the returns for this period are predictable then the appropriate withdrawal rate can be set to prevent failure. Also consider the inability of anyone to know whether they are saving enough money 10 or 20 years before retirement.
The PE10 gives some estimate of the very-long-term returns that can be expected. By including the trailing ratio he allows for higher valuations when interest rates are low and vice versa. It looks only at earnings and growth. It assumes that earnings NOT generating growth will be paid out as dividends.
Presumably this is because management will be replaced if they fail to sweat the net assets into generating an acceptable return. Since book value is used in 'proofs' throught this site as the basis for stock prices it is important you understand the issues discussed on the Other Metrics page.
The metric is intrinsically forward looking, based on the most recent valuation of assets. Tech companies' major assets are their employees - who don't show up on any Balance Sheet. But banks and life insurance companies hold financial assets which are marked-to-market each Balance Sheet date.
Their income is mostly portfolio returns - dependant on their assets.Stocks have two types of valuations.
One is a value created using some type of cash flow, sales or fundamental earnings analysis. The other value is dictated by how much an investor is willing to pay for a particular share of stock and by how much other investors are willing to sell a stock for (in other words, by supply and demand).
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Small cap valuation recovered as markets sold off in and early , but it appears that the recent rally has once again left small cap stocks appearing expensive. Lastly, as the following table indicates, the and market rallies, which followed significant sell-offs, had most of their gains soon after the market recovery began.
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Finance: Stocks and their valuation Subject: Business / Finance Question DPS calculation Weston Corporation just paid a dividend of $ a share (i.e., D0 = $).
The dividend is expected to grow 9% a year for the next 3 years and then at 4% a year thereafter.
What is . Valuation metrics for stock selection. Pros and cons regarding P/E, PEG, Price to book, Price to sales, Dividend yield. There is a saying "Sell resource stocks when their P/E is low and buy when high".
Resource investors are very mindful to be counter-cyclical. Any valuation of a stock would therefor use P/E to value the productive.