Based on what I read, I thought a lower justified forward P/E than the market means stock is undervalued but according to this solution on Finquiz its sayign the opposite?
“lower justified forward P/E than the market means stock is undervalued” --> incorrect
Correct relationship: Higher(Lower) justified forward P/E --> stock is under(over) valued [Finquiz is correct!]
Use the below logic:
Justified P/Es are based on fundamental values of stock. “Normal” P/Es are based on actual prices of stock
Therefore, if Justified P/E > “Normal” P/E, stock is undervalued because Fundamental value > Actual price
I see. Thank you 