Doing a little lazy Saturday afternoon reading about valuing growth stocks and found this interesting
IBD article about there being no correlation between P/E ratios and a stock's subsequent run-up.
https://www.thebalance.com/peter-lynch-s-secr...th-3973486Quote:Lynch's PEG Ratio
Peter Lynch developed the PEG ratio as an attempt to solve a shortcoming of the P/E ratio by factoring in the projected growth rate of future earnings. That way, if two companies are trading at 15x earnings, and one of them is growing at 3 percent but the other at 9 percent, you can identify the latter as a better bargain with a higher probability of making you a higher return. The formula for PEG is:
PEG Ratio = P/E Ratio / company's earnings growth rate. To interpret the ratio, a result of 1 or lower says the stock's either at par or undervalued based on its growth rate. If the ratio results in a number above 1, conventional wisdom says the stock is overvalued relative to its growth rate. Many investors feel the PEG ratio gives a more complete picture of a company's value than a P/E ratio.
IBD article about there being no correlation between P/E ratios and a stock's subsequent run-up.
https://www.investors.com/how-to-invest/inves...investing/Quote:For example, Google's (GOOG) P-E ratio was a whopping 133 when it broke out above a 113.58 buy point in September 2004, not long after it went public. The Internet search engine went on to quadruple by January 2006, to a high of 475.11.
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IBD research has found that strong fundamentals and a sound chart, not P-E ratios, are far more relevant in determining whether a stock will be successful.
Google's earnings roughly doubled every quarter for six straight quarters leading up to its September 2004 breakout, and revenue growth was similarly robust. The strong, sustained earnings growth was the reason why Google traded at such a high premium. As growth slowed, so did Google's P-E Ratio, which now stands at about 20.
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