Fire Your Stock Analyst!: Analyzing Stocks on Your Own

Step 2: Valuation

Gauging the expectations built into a stock’s current price and determining buy and sell target prices are the linchpins of value investing. The GARP (growth at a reasonable price) strategy does not apply to the value analysis.

Implied Growth

Table 5.1 in Chapter 5 identifies the long-term earnings growth rate implied by a stock’s P/E ratio. Value candidates should be priced at a minimum 50 percent discount to their normalized growth rates.

For example, suppose that you’ve identified a candidate that you expect to resume its earlier 15 percent average annual earnings growth rate when it recovers from its current difficulties. In that instance, you’d expect the candidate’s current price to reflect no more than half the 15 percent ...