Historically, stock valuations have been an important predictive factor of future returns. A standard practice is to measure value by comparing stock prices to fundamental measures such as trailing earnings, projected earnings, dividends, and book value. I am increasingly questioning the usefulness of these measures however. While an enormous body of research has shown that … Continue reading Do stock valuations matter anymore?
The foundation of fundamental analysis is determining whether companies, sectors, and markets are expensive or cheap relative to measures of their inherent value. The most commonly-cited measure of value for stocks is the price-to-earnings (P/E) ratio. We might look at the most-recent year's earnings, the standard for P/E, or average earnings over a longer period … Continue reading Are stocks too expensive to be attractive?