What Is Relative Valuation?
Relative valuation values an asset based on how similar assets are priced in the market. A prospective house buyer decides how much to pay for a house by looking at the prices paid for similar houses in the neighborhood. A baseball card collector makes a judgment on how much to pay for a Mickey Mantle rookie card by checking transaction prices on other Mickey Mantle rookie cards. In the same vein, a potential investor in a stock tries to estimate its value by looking at the market pricing of “similar” stocks.
Embedded in this description are the three essential steps in relative valuation. The first step is finding comparable assets that are priced by the market, a task that is easier to accomplish with real assets ...
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