A justified mulitple is what the multiple SHOULD be if the stock is fairly priced. If the actual multiple is greater than the justified price multiple (intrinsic value that we calculate), the stock is overvalued. But it later says that a P/E of a stock is undervalued if it is less than the benchmark, which makes sense to me. Can someone please explain the difference as to when P/E’s are over or undervalued, because the first paragraph seems to contradict. Thanks!!
There are two ways to determine - First way … (Based on Fundamentals) Calculate justified P/E/… based on retention, g etc if (P/E)actual > (P/E)justified --> overvalued , else undervalued. Here the comparision with stock’s intrinsic multiple Second way (based on Market) (P/E)actual > (P/E) benchmark --> Overvalued relative to benchmark or else undervalued relative to benchmark… We can’t say anything more when we compare it with benchmark.