Theoretically, the price of stock should reflect the net present value of the fu
ID: 2474135 • Letter: T
Question
Theoretically, the price of stock should reflect the net present value of the future flow of dividends utilizing a risk adjusted discount rate. Nevertheless, certain stocks such as Google have phenomenal price to earnings ratios. Discuss why the price-to-earnings ratios are so high and what the justification may be for their stock prices. Comment on: High stock prices reflect higher earnings growth. Some believe the stock prices are unrealistic and rely on the bigger fool theory. Recall the tech bubble bursting after March 2000.
Explanation / Answer
P/E ratio is good for people who follow a rigorous fundamental analysis approach to invest.
Yes, high stock prices reflect high earnings.
Be ware of stocks with high P/E ratios during an economic boom. it definitely applies to stocks - even many bad ones - so it's wise to be suspicious of any upward price movement that isn't supported by some logical, underlying reason outside of the general economic climate.
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