Valuation Metrics Essay example

1430 Words Jul 6th, 2012 6 Pages
"Which Valuation Metrics Work Best for Stock-Picking Within the Sector?"

FIN630 Section 9044
Professor John Halstead
October 30, 2011

The article entitled “Which Valuation Metrics Work Best for Stock-Picking Within the Sector?” studies the effectiveness of several market valuation multiples in predicting outperformance of regulated utility stocks relative to the industry as well as the S&P 500 index from 1972 to 2010. The study that was conducted utilizes a database of financial information on publicly traded regulated utility stocks. “The initial source for the universe of firms was from FactSet, and consisted of all publicly traded stocks, that were classified as "Electric Utilities" under the Fact Set industry
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The earnings used are just an estimate and are not as reliable as current earnings data, there is still benefit in estimated P/E analysis. The forecasted earnings used in the formula can either be for the next 12 months or for the next full-year fiscal period.”

Price-to-Book Value: A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.

Price-to-cash flow from operations (CFO): “A measure of the market's expectations of a firm's future financial health. Because this measure deals with cash flow, the effects of depreciation and other non-cash factors are removed. Similar to the price-earnings ratio, this measures provides an indication of relative value.” Martin,J.,&Titman,S.(2011)

P/E-to-long-term growth rate (PEG): A ratio used to determine a stock's value while taking into account earnings growth.

“PEG is a widely used indicator of a stock's potential value. It is favored by many over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is more undervalued.” Martin,J.,&Titman,S.(2011).
Dividend Yield: is a financial ratio that shows how much a company pays out in dividends each year

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