*

* Is 12.5 times earnings too much to pay for Growth

You are using price to challenge price

Price is what you pay, Value is what you get

You may be promoting a bubble

Hot IPO Phenomenon
The internet bubble was a chain letter and
investment bankers were the postmen

You may be trading against screeners.

* Technical screens: identify positions based on trading indicators

* Price screens
* Small stock screens
* Neglected stocks screens
* Seasonal screens
* Momentum screens
* Insider trading screens

* Fundamental screens: identify positions based on fundamental

indicators of the firms operations relative to price

* Price/Earnings (P/E) ratios

* Market/Book Value (P/B) ratios
* Price/Cash Flow (P/C) ratios
* Price/Dividend (P/d) ratios
* Any combination of these methods is possible

1.Identify a multiple on which to screen

stocks.

2.Rank stocks on that multiple, from highest

to lowest.

3.Buy stocks with the lowest multiples and

(short) sell stocks with the highest
multiples.

You are using very little information.pitted

against someone who has done the homework
Ignore information at your own peril

You may be loading up on Risk

Prices are lower relative to earnings and book
value if THERE IS MORE RISK

The P/E ratio reflects the market forecast of

growth: a higher P/E means more expected
growth
But growth is risky and risk means a lower price
relative to earnings
HOW TO CHALLENGE RISKY GROWTH IN P/E
RATIOS?

* Growth is risky so risky growth should have

lower PEG ratios

Beware of ROE

Beware of ROA too

Conceptual problems:

* Circular reasoning: Price is ascertained from price (of the

comps)

* Violates the tenet: When calculating value to challenge

price, dont let price enter the calculation

* If the market is efficient for the comparable

companies....Why is it not for the target company ?

Implementation problems:

* Finding the comparables that match precisely

* Different accounting methods for comps and
target

* Different prices from different multiples

* What about negative denominators?
Applications:

* IPOs; firms that are not traded (to approximate

price, not value)

Unlevered Price/Sales Ratio =

Unlevered Price/ebit =

Market Value of Equity + Net Debt

ebit

Unlevered Price/ebitda =

Enterprise P B =

Market Value of Equity + Net Debt

Sales

Market Value of Equity + Net Debt

ebitda

Market Value of Equity + Net Debt

Book Value of Equity + Net Debt

Trailing P/E =

Rolling P/E =

Price per share

Sum of Eps for most recent four quarters

Forward P/E =

Price per share

Last annual Eps

Price per share

Forecast of next year' s Eps

Dividend - Adjusted P/E =

Price per share + Annual Dps

Eps

Rationale : Dividend affects prices but not earnings