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 ...

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