As a full time investor in microcap stocks, the question: “What multiple should company XYZ trade at? “ is a common one. Easy answers are hard to come by especially when well followed largecaps often trade at illogical valuations. In our member’s section at MicroCapClub, Ryan Parker recently illustrated this by analyzing Apple (AAPL), Google (GOOG), Coca-Cola (KO), and McDonald’s (MCD). It really is mind-boggling how high-growth companies like Apple and Google sitting on mountains of cash can trade at lower PE multiples then slower growing companies like Coca-Cola and McDonalds.
I found this article by McKinsey & Company interesting on this subject:
Why Bad Multiples Happen To Good Companies
Earnings multiples, particularly the price- to-earnings (P/E) ratio, are a common shorthand for summarizing how the stock market values a company. The media often use them for quick comparisons between companies. Investors and analysts use them when talking about how they value companies…
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