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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Seeker of Truth who wrote (30530)8/26/2000 9:11:42 AM
From: sditto  Read Replies (4) of 54805
 
<<Finally, I continue to be amazed at the growth rates we are finding in, for example, NTAP, SEBL, VRTS, etc. Way back when, 25% a year was simply astounding. Why shouldn't the P/E's be much higher now?>>

I don't have any historical statistics to back up your theory about high P/Es vs high growth but I can offer up a little math which helps illustrate a useful point.

The price/earnings growth (PEG) ratio was developed to help differentiate companies with similar P/E ratios by comparing their current price to their projected earnings growth rate. Common thought is a company with a PEG ratio of 1 is fairly valued, <1 undervalued (bargain), and >1 overvalued (expensive). However, few people (almost nobody actually) realizes PEG is a linear approximation of earnings growth which is in fact an exponential function. The real world implication is the higher the rate of earnings growth the more PEG underestimates the value of a company. If Company A and B have the same PEG but Company B has twice the earnings growth, all other things being equal Company B is a far the better value.

For companies with earnings growth in excess of 30% Y/Y you can safely bet many people are calling it overvalued and they will most likely be wrong. For companies inside the tornado with earnings growth in excess of 30% Q/Q you can safely bet almost everyone in the market will be calling it overvalued and they will be most assuredly wrong.
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