In a recent white paper, Epoch’s chief executive and chief investment officer, Bill Priest, explored this very theme of price to earnings (P/E) ratios.
The job of an active global equities manager is to identify alpha opportunities — situations where the market price of a stock is incorrect. But it’s not enough to simply decide what an investor believes a stock is worth and then compare it to the market price.
Part of the process of deciding that the market price is incorrect has to involve figuring out what assumptions the market is making about the three key variables — the company’s free cashflow, its growth rate and its cost of capital — that drive the fundamental value of the business. Without that analysis, investors are not making an informed assessment.
To read the article published in Money Management, click here.