Post #193 by DTB on the Falling Knives board

Investment Strategies / Falling Knives

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$7 eps base cade, 10% growth x 5 years x 18 PE = $202. 12% discount rate = $114 IV now. 20% overvalued imo, thoughts?

My thoughts are that this is just another way of saying you can't get 12% returns from a stock that grows its earnings at 10%, if the ratio stays the same as it is now (18).

I think a more straightforward way of presenting these numbers is to say that, if the earnings grow 10% a year, you will get a 10% return, as long as the price to earnings ratio stays at 18. If in 5 years the ratio has gone back to its historical average of about 24, then you'll get a return about 6 points higher than that.

dtb

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