Growth at a Reasonable Price

Many growth investors don't spend much time worrying about the subtleties of stock valuation. Instead, they adhere to a “keep it simple” philosophy. In their view, valuation boils down to earnings and earnings growth.

These investors look for a balance between price and expected earnings growth. Specifically, they want to buy growth at a reasonable price (GARP). The reasonable price is determined by comparing a stock's P/E to the company's expected annual earnings growth rate.

PEG and Fair Value

A stock is said to be fairly valued when its P/E equals its growth rate, undervalued when trading at a P/E below its expected growth, and overvalued when trading above. For example, if a company is expected to grow earnings ...

Get Fire Your Stock Analyst! Analyzing Stocks on Your Own now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.