They can't arbitrate the debate between bulls and bears
because valuation metrics don't reliably mean - revert.
It can place me in the «caricature» camp for value managers,
because my valuation metrics are usually lower than most.
Not exact matches
Looking at ROIC and PEBV help you to identify winners and losers
because those
metrics cut through the noise and artificial accounting constructs that are at the heart of the
valuation methodologies used by many investors.
Understanding the industry is very helpful when valuing companies
because different industries might have more useful
valuation metrics than others.
Because of this, the most common
valuation metric that investors use — the price - to - earnings ratio — is not the best
metric to assess Exxon's
valuation.
* Accounting issues: in one sense this takes the fourth point to an extreme - the stock market's
valuation of a company is flawed, not
because it's focusing on the wrong
metrics but
because profits or other key financial data are being flattered or even fabricated by company management.
P / E is not a good predictor of index - level returns
because overall
valuations remain essentially correct through market cycles while the
metric is pro-cyclical.
There are some stocks which may appear cheap
because they are trading at a low
valuation metrics such as PE, price to book value ratio, cash flow ratio etc..
However if at years end stocks are now considered 10 % over valued by those same
metrics and your stock allocation is now at 55 %
because of the returns then rather than adjusting back down to 50 % perhaps now you adjust your reasonable allocation percentage down to 45 % to reflect to over-
valuation that is inherent in the current
valuation of the stock market.