The holy grail in the business of equity investing centres on how you pick stocks and, in my opinion, sectors as well. All the methods that look at the valuation measures be they PERs or Price-to-Book etc. tend to be backward looking – very much like using rear view mirrors.
Yes there is that argument about prospective or forward looking multiples. However these really centre on what we estimate the companies to be doing in the future; i.e. it’s has to be forward looking, and taking a view about how the business is going to do.
Therefore it’s buying into companies whose growth prospects are great and the profits growing, preferably better than the analysts and investors expectations. And this relativity to expectations is critical to whether the stock price will go up. Naturally this also means “cheapness” is more than an absolute measure; i.e. a multiple of ......