what’s the test to see if a given PE is under/overvalued? PE from GD model < The given PE -------> UNDERVAULED?
if duration from model is higher than actual then overvalued
“PE from GD model < The given PE -------> UNDERVAULED?” yes
Thank you Houston…you’ve been so quiet on the board, are you ready for this exam Princess?
This seems odd, can someone explain the logic to this. If the growth duration model spits out a P/E that is less than given (I assume its the current market P/E) wouldn’t that mean its overvalued?
The growth duration model isn’t calculating intrinsic value. You are calculating what the market is perceiving the growth rate is. Let’s say you expect growth to be sustained for 3 years, but you calculate the growth duration model and it says 6 years. It’s suppose to be three years according to your estimates, so you short the stock.
Ah . . . makes sense, thank you.