How Do the Stocks Price Valuations Compare with Those of Similar Firms?
While classic-growth stocks typically don’t command the sky-high valuations of aggressive growers, the market usually tags a premium on them because of their reliability. Looking at a stock’s valuations relative to other stocks of the same type can be helpful in gauging the relative value of the stock. By traditional valuation measures such as price/earnings and price/sales ratios, McDonald’s was somewhat on the pricey side at the end of 1999 compared with other classic-growth firms. To see how expensive McDonald’s is relative to its growth rates, check its PEG ratio, or price to earnings growth, which indicates how much investors are paying for growth. This stock’s PEG of 2.6 is also high for the classic-growth group, indicating that the market is expecting McDonald’s to grow faster in the future than it has the past few years. Conclusion: Quality versus Price A price tag on the high side even relative to other classic-growth stocks doesn’t automatically mean investors should pass on
