Bridge over ocean
1 January 1995 Financial Analysts Journal Volume 51, Issue 1

A Method of Valuing Growth Stocks

  1. George Mackintosh

The study reported here was undertaken to devise a method for checking the reasonableness of the apparently high price–earnings ratios of the so-called secular (long-term) growth stocks. The study examined earnings and dividends for 1926 and 1936 (chosen for the similarity of their economic conditions) and used stock prices as of August 1927 and February 1937. Various financial statistics for growth and nongrowth companies led to suggested reasonable price–earnings ratios, in periods of optimism, for various annual secular growth rates (up to 10 percent) and varying proportions of earnings paid out in dividends. Such information is useful in appraising stock prices in rosy market conditions and estimating future earnings of specific companies. The analyst can translate a company's estimated earnings into stock prices by estimating the outlook for earning's growth at the time of analysis.

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