Quick Rules for Recognizing Value and Un-Value

This summarizes how to use PE and its "family of measures to recognize value and un-value in stocks and stock prices.

Many of these can be found in common stock screeners, so it's possible to use these factors not only for final valuation but also for stock selection.


Value

First, find sound and improving business fundamentals - improving ROE drivers and intangibles. Then:

Earnings yield > bond yield (now or soon, some compensation for equity risk)

PEG 2 or less (growth at a reasonable price)

Stock price growth potential exceeds hurdle rate (e.g. 15%, 10 years, probably better than most other investments)

P/S less than 3 and profit margin greater than 10% (good profitability at reasonable price)

P/B less than 5 and ROE greater than 15% (good overall returns at reasonable price)

Shares of companies that fit the preceding factors (the more factors, the better) are more likely to be a good value for the price.

Un-value

Earnings yield < bond yield with low growth prospects

PEG greater than 3 with low margins

Stock price growth falls short of hurdle rate (e.g., 15%)

P/S greater than 3 with low margins

P/B greater than 5 with low ROE