Replies to post #145291 on Biotech Values

[biomaven0]

I see no reason that stocks growing at 6-7% (double the GNP growth rate over any long term period) should have a p/e over 8.

It's a big mistake in my view to look at a p/e (or its inverse, the earnings yield) divorced from the prevailing long term interest rate.

Peter

[DewDiligence]

Re: Stock valuation

I see no reason that stocks growing at 6-7% (double the GNP growth rate over any long term period) should have a p/e over 8.

The question to ask is: How long can the company in question continue growing earnings at 6-7% per annum?

It’s mathematically trivial to show that any company who grows earnings indefinitely at a rate higher than the rate at which you discount future earnings has a net present value of infinity. This is why Peter is correct in saying that valuation analysis cannot be conducted without considering interest (i.e. discount) rates (#msg-77377475).