New Technique  |  MAY 2001

Screening For Misvalued Stocks by Martti Luoma and Reijo Ruuhela

Valuing A Stock Using Earnback Periods Screening For Misvalued Stocks by Martti Luoma and Reijo Ruuhela You won’t get an edge on finding good trades using the same tools everyone uses. Here’s a new look at finding misvalued stocks. T he price/earnings ratio (P/E) is undoubtedly the most common valuation measure of a stock, and also the most commonly misused. P/E combines outside information (price) and inside information (earnings). Because of the central roles that price and earnings play, it is not particularly surprising that the use of P/E is so popular among analysts and investors. It is well known that stocks should have as near to the same growth rate as possible when they are compared using P/E, because the valuation of a stock is not a matter of analyzing only a single year’s earnings. Unfortunately, it is often necessary to compare stocks with different growth rates. As a measure of valuation, however, P/E neglects different growth rates of earnings.

by Martti Luoma and Reijo Ruuhela