Wall Street wisdom (pardon the oxymoron) adheres to the KISS principle as its highest virtue: Keep It Short and Simple. Most highly prized by brokers are slogans that fit easily on t-shirts and bumper stickers.
As an example, one popular investment rule of thumb is that for a fully and fairly valued growth stock, the stock's price-to-earnings ratio should be equal to the percentage of the growth rate of the earnings per share of the associated company, i.e. PE = G. As with any such rule of thumb, this is not only superficial but also arbitrary and capricious.
A common screen based on this heuristic is the ratio of the PE ratio to the EPS growth rate, or the PE/G. In an effort to better fit the historical performance of cyclical stocks and large-cap stocks, ad hoc variations on the PE/G ratio include
- (1) using an estimated future growth rate instead of an historical growth rate or PE/FG,
- (2) adding the dividend yield percentage to the EPS growth rate percentage or PE/DG, and
- (3) adding two time the dividend yield percentage to the EPS growth rate percentage or PE/2DG.