Stock analysts and market commentators are a very imaginative lot. They can always be counted on to find ways to justify some predetermined conclusions or narratives. This is partly why we see “new” valuation metrics all the time when the old ones do not work to fit the story.

Case in point: We have previously explained how the price-earnings (PE) methodology was used to justify higher and higher prices for glove stocks at the height of the Covid-19 pandemic — multiplying short-term supernormal profits by the historical average PE ratio, even though doing so is quite clearly absurd. When this no longer worked — when share prices started falling with vaccination rollouts — the valuation methodology was “changed” to discounted cash flow (DCF) or some modified combination of DCF-PE-cash flow. To the layperson, it all sounds very scientific. But, in fact, it is just a mirage.

We have said this many times before — we cannot decide to change the methodology whenever it suits us because there is ever only one way to value companies, and that is the DCF methodology. All other valuation metrics, such as the PE ratio, are just shortforms (simplified versions) of DCF.

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