In Peter Lynch’s book, he discusses the idea of valuation. He has a few different ways of doing it.
The Peter Lynch Method
One way is to look at the P/E ratio over time and compare it to a hypothetical average of 15. If the stock dips below the average, it’s a signal that it’s undervalued.
Another method is to look at the PEG ratio. The PEG ratio is the Price/Earnings divided by the Growth rate. For the “Fast Growers” this is an easy way to assess value. If the PEG ratio is higher than one, the stock is over valued. If the PEG ratio is below one, the stock is under valued.
These are a couple of the many ways Lynch assesses value. I’ve used them myself with great success.
The Aswath Damodaran Method
Of course, other ways of valuation exist. I like to seek out experts in valuation. NYU’s professor of Finance, Aswath Damodaran, is one such expert in business valuation.
For almost four decades Damodaran has valued businesses. As a result, his reputation for accurate valuation has earned him respect. Everyone from investment firms, to the media, consult him on asset valuation.
Lucky for us he’s written a book on valuation. The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit gives individual investors an opportunity to learn his valuation techniques.
A free valuation app
Also, Damodaran has a free app called uValue.
The link above takes you to the uValue website. There you can learn about how it works before downloading it. You’ll need to download it through the app store on your iPhone or Android device.
To be a successful investor, it’s important to understand valuation. I hope this helps you on your investment journey.
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