The Gauge Growth Yardstick is Stock Prices

by David Jenyns on April 13, 2009

There is no sense in reading a word about growth stocks until you have learned the fundamentals of general stock market investing.

Book value is obtained by adding the company’s assets and dividing the sum by the number of common shares outstanding to get book value per share. Price-earnings ratio is a much more realistic standard of measurement. Some stocks are evaluated as low as four or even three times earnings, while others as high as 30, 40, 50 or even more times.

The 425 industrial stocks composing the Standard & Poor index are selling at an average of 19 or so times their latest twelvemonth earnings. The more the market values a certain stock, the higher it places its multiplier, and vice versa.

Generally speaking, the 19 or so times earnings for Standard & Poor’s industrial stocks are undoubtedly high, compared with 12 to 15 times earnings for the inflationary period of 1954-57.

In order for a company to pay a six percent dividend, it had to earn 10 percent—hence the 10-times-earnings yardstick. The vastly changed fundamental environment apparently accounts for the average investor’s willingness to buy many stocks at prices that are considered high by the traditional standard.

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