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Non-Tech : OAKLEY- NYSE:OO
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To: Michael Collins who wrote (193)2/28/1997 9:27:00 AM
From: Peter Longerich   of 1383
 
Michael,

Many investors use a general rule of thum:
If the P/E is less than the sustainable long run growth rate, then the stock is undervalued. For example, if a company has a long term sustainable growth rate of 20%, it should be valued with a P/E of 20. If the sustainable growth rate is 15%, then the target P/E would be 15.

The problem with your analysis is that you are using a one year growth forecast (instead of a long term sustainable growth rate) to estimate a price target.

If a stock had earnings of $0.50/share and was projected to grow to $1.00 next year (i.e. 100% growth) and then 5% growth per year thereafter, your method would value the stock at $50.00 per share.

I think we can all agree that a stock with $1.00 earnings and a 5% projected growth rate should not sell for $50.00 / share.

Bye the way, don't you want to know which stocks my dog is reccomending?

Pete
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