November 11, 2024
If the available data (P/E ratio, projected earnings growth rate, risk-free interest rate, expected market
return, Beta) are consistent, the NASDAQ appears close to a correction based on the Potential Payback Period
(PPP), which synthesizes all these data.
The discount rate "r" is calculated using the Capital Asset Pricing Model (CAPM), which incorporates the
expected market return, a risk-free interest rate, and Beta (β) as a risk factor associated with any stock.
The formula for "r" is:
More information at https://www.stockinternalrateofreturn.com/index.html
The PPP concept can be further developed to make it a more concrete and practical evaluation tool for stocks
while keeping it closely related to corporate finance for the sake of rigor. This approach naturally led to
the "Internal Rate of Return" (IRR) applied to stocks.
From a stock’s PPP, we can deduce its IRR, recognizing that both PPP and IRR are common tools for selecting
investments in corporate finance. In corporate finance, the IRR is the discount rate that equates the
initial investment with the expected net cash flows from that investment over its lifetime. By applying this
concept to an investment in a stock and using the PPP as the investment's duration, we can derive a precise
Internal Rate of Return for each PPP value. In other words, the redefined IRR, as a tool for evaluating a
stock, is the discount rate that enables an investor to potentially double their investment through the
cumulative earnings per share over the calculated PPP period for that stock.
Expressed as a percentage, the IRR is more concrete and meaningful in conveying the attractiveness and
opportunity of an investment, whether for an industrial investment or an investment in a stock market.
In real life, the PPP varies within a relatively narrow range of 5 to 15 years, corresponding to an IRR that
moves in the opposite direction of the PPP, ranging from 15% to 5%. These PPP and IRR figures can be
considered significant, realistic, and credible due to their reasonable order of magnitude and relative
stability, reflecting the consistency, rationality and homogeneity of financial markets, as shown in the
graph below depicting the evolution of the IRR as a function of the PPP.
To evaluate the attractiveness of a stock, one must compare its IRR (Internal Rate of Return) with a
risk-free interest rate, such as the yield on a 10-year U.S. Treasury bond. The IRR of the stock should be
higher than the risk-free interest rate to reflect the risk premium associated with each stock.
Currently, using the most favorable underlying data provided today by ChatGPT, the IRR of the NASDAQ is very
close to the yield on the 10-year U.S. Treasury bond: 4.07% versus 3.92%. A correction seems likely.
However, this correction will primarily affect companies that have poorer growth prospects combined with a
relatively high P/E ratio, meaning a relatively high PPP.
Most Favorable Scenario
• P/E ratio: 24.60
• Earnings growth rate (g): 12%
• Discount rate (r): 3.92 + 1.2 (7.00 – 3.92) = 7.616%
• PPP: 17.39 years
• IRR: 4.07%
Less Favorable Scenario
• P/E ratio: 24.60
• Earnings growth rate (g): 10%
• Discount rate (r): 3.92 + 1.4 (8.00 – 3.92) = 9.632%
• PPP: 23.68 years
• IRR: 2.97%
Instant calculations at https://www.stockinternalrateofreturn.com/instant_calculations.html
ALPHABET, NVIDIA, and AMAZON appear to be the most attractive stocks among the "Magnificent Seven," based on
the Potential Payback Period (PPP), a comprehensive and dynamic metric that combines the P/E ratio,
projected earnings growth rate, and an appropriate discount rate. The discount rate incorporates a risk-free
interest rate, the expected market return, and the beta as a risk factor associated with each stock, in line
with the CAPM.
- Most of these stocks appear "overvalued" based on their relatively high and disparate P/E ratios,
which do not take growth into consideration.
- They all seem "overvalued" on the basis of their PEG ratios, which are all over 1.
- Their valuation becomes more consistent, realistic, and nuanced when using the PPP, with an
overvaluation threshold of 17.96. This corresponds to a stock internal rate of return of 3.94%, which is
equivalent to the current yield on the 10-year US Treasury bond.
- It is advisable to continuously update the data in the table and perform simulations for all
variables, especially the projected earnings growth rate, to which the PPP is very sensitive. This PPP
sensitivity to earnings revisions is a reflection of market behavior.
Object: Proposal for a New
Metric for Stock Evaluation, the Potential Payback Period (PPP), Considered
Revolutionary by ChatGPT Using Artificial Intelligence.
Dear Stock Investor,
I would like to propose the inclusion of the Beta-Adjusted Potential Payback Period (in short Potential
Payback Period or PPP) as a new metric for stock evaluation alongside the P/E ratio and PEG ratio.
An unprecedented ChatGPT analysis concludes that "The PPP is a game-changer in
stock evaluation. By
rigorously integrating key variables (P/E ratio, earnings growth rate, interest rate, Beta) into a
one-figure metric, it empowers investors with a comprehensive and practical measure, enhancing their
ability
to make informed, strategic decisions. This metric is poised to become an essential tool for modern
financial analysis, revolutionizing how investors evaluate and manage their portfolios."
The rigorous integration of the above key variables ensures that the PPP, starting from the P/E ratio,
provides a more comprehensive, realistic, precise, and tailored metric for stock evaluation, accounting for
growth potential, the time value of money, and risk factors.
Given its synthetic and dynamic nature, the PPP represents a significant financial innovation. It
effectively integrates the P/E ratio, earnings growth rate, expected market return, risk-free interest rate,
and Beta into a single and handy figure that can effectively "revolutionize how investors evaluate and
manage their portfolios."
Comparisons with Traditional Metrics
• P/E Ratio: The P/E ratio is a static metric, failing to account
for earnings growth or risk. From the PPP formula, we can see that the P/E ratio is only a special case of
the PPP in a purely theoretical static world with no growth, no inflation, no interest or discount rate, and
no risk. The PPP dynamically adjusts for these factors, providing a more accurate picture beyond comparison.
• PEG Ratio: While the PEG ratio tentatively adjusts the P/E ratio
by the earnings growth rate, it relies on a rule of thumb in the form of a simplistic division of the P/E
ratio by the earnings growth rate. In contrast, the PPP uses mathematical logic and precision to incorporate
growth and other variables.
Given that you already receive all the necessary inputs (P/E ratios, earnings growth rates, interest rates,
and Betas) for the stocks you are interested in, integrating the PPP calculation would be a seamless
addition. You can also ask your financial services providers to systematically calculate the PPP for all
stocks.
To illustrate the practicable and handy nature of the PPP, please consider the following concrete examples
of US stocks as of July 2024.
The expected market return for US stocks (rM) is projected to be around 6% as of July 2024 (according to
ChatGPT), while the yield on the 10-year US Treasury bond (rF) is around 4.20%. Discount rate r = rF + ß (rM
– rF) = 4.20 + ß (6.00 – 4.20) = 4.20 + ß (1.80)
- Most of these stocks appear "overvalued" based on their relatively high and disparate P/E ratios,
which do not take growth into consideration.
- They all seem "overvalued" on the basis of their PEG ratios, which are all over 1.
- Their valuation becomes more consistent, realistic, and nuanced when using the PPP, with an
overvaluation threshold of 16.84. This corresponds to a stock internal rate of return of 4.20%, which is
equivalent to the current yield on the 10-year US Treasury bond.
- It is advisable to continuously update the data in the table and perform simulations for all
variables, especially the projected earnings growth rate, to which the PPP is very sensitive. This PPP
sensitivity to earnings revisions is a reflection of market behavior.
Based on the attached assessment of the PPP by ChatGPT, and on additional information provided at
www.stockinternalrateofreturn.com, I firmly believe that the PPP could transform
investment strategies by
enabling better risk management, optimized portfolio allocation, and more accurate evaluations, leading to
more stable, long-term returns. It is especially valuable in today's volatile market environment, where
understanding the interplay between growth potential and risk is crucial.
I would be pleased to discuss this further and provide any additional information you may need. Thank you
for considering the suggestion to incorporate PPP into your portfolio management tools.
Sincerely,
Rainsy Sam
Website: www.stockinternalrateofreturn.com
LinkedIn: https://www.linkedin.com/in/rainsy-sam-2891a347/
Object: Proposal for a New
Metric for Stock Evaluation, the Potential Payback Period (PPP), Considered Revolutionary by ChatGPT
Using Artificial Intelligence.
Dear Financial Services Provider,
I would like to propose the inclusion of the Beta-Adjusted Potential Payback Period (in short Potential
Payback Period or PPP) as a new metric for stock evaluation alongside the P/E ratio and PEG ratio.
An unprecedented ChatGPT analysis concludes that "The PPP is a game-changer in
stock evaluation. By
rigorously integrating key variables (P/E ratio, earnings growth rate, interest rate, Beta) into a
one-figure metric, it empowers investors with a comprehensive and practical measure, enhancing their
ability
to make informed, strategic decisions. This metric is poised to become an essential tool for modern
financial analysis, revolutionizing how investors evaluate and manage their portfolios."
The rigorous integration of the above key variables ensures that the PPP, starting from the P/E ratio,
provides a more comprehensive, realistic, precise, and tailored metric for stock evaluation, accounting for
growth potential, the time value of money, and risk factors.
Given its synthetic and dynamic nature, the PPP represents a significant financial innovation. It
effectively integrates the P/E ratio, earnings growth rate, interest rate, and Beta into a single figure.
This metric provides a more comprehensive, realistic, precise, versatile, and handy measure of stock
valuation.
Comparisons with Traditional Metrics
• P/E Ratio: The P/E ratio is a static metric, failing to account
for earnings growth or risk. From the PPP formula, we can see that the P/E ratio is only a special case of
the PPP in a purely theoretical static world with no growth, no inflation, no interest rate, and no risk.
The PPP dynamically adjusts for these factors, providing a more accurate picture beyond comparison.
• PEG Ratio: While the PEG ratio tentatively adjusts the P/E ratio
by the earnings growth rate, it relies on a rule of thumb in the form of a simplistic division of the P/E
ratio by the earnings growth rate. In contrast, the PPP uses mathematical logic and precision to incorporate
growth and other variables.
Given that your company already collects and publishes all the necessary inputs (P/E ratios, earnings growth
rates, interest rates, Betas), incorporating the PPP would be a seamless addition. This metric would offer a
significant "plus" to the information and counseling services you provide to your clients, distinguishing
your company as a leader in financial analysis and stock evaluation.
To illustrate the practicable and handy nature of the PPP, please consider the following concrete examples
of US stocks as of July 2024.
The expected market return for US stocks (rM) is projected to be around 6% as of July 2024 (according to
ChatGPT), while the yield on the 10-year US Treasury bond (rF) is around 4.20%. Discount rate r = rF + ß (rM
– rF) = 4.20 + ß (6.00 – 4.20) = 4.20 + ß (1.80)
- Most of these stocks appear "overvalued" based on their relatively high and disparate P/E ratios,
which do not take growth into consideration.
- They all seem "overvalued" on the basis of their PEG ratios, which are all over 1.
- Their valuation becomes more consistent, realistic, and nuanced when using the PPP, with an
overvaluation threshold of 16.84. This corresponds to a stock internal rate of return of 4.20%, which is
equivalent to the current yield on the 10-year US Treasury bond.
- It is advisable to continuously update the data in the table and perform simulations for all
variables, especially the projected earnings growth rate, to which the PPP is very sensitive. This PPP
sensitivity to earnings revisions is a reflection of market behavior.
Based on the attached ChatGPT analysis titled "Introducing the
Beta-adjusted Potential Payback Period (PPP):
A revolutionary one-figure metric for comprehensive stock evaluation", and on additional
information
provided at www.stockinternalrateofreturn.com, I firmly believe that the PPP
could transform investment
strategies by enabling better risk management, optimized portfolio allocation, and more accurate
evaluations, leading to more stable, long-term returns. It is especially valuable in today's volatile market
environment, where understanding the interplay between growth potential and risk is crucial.
I would be delighted to discuss this further and provide any additional information you may require. Thank
you for considering this suggestion to enhance the value your company offers to its users.
Sincerely,
Rainsy Sam
Website: www.stockinternalrateofreturn.com
LinkedIn: https://www.linkedin.com/in/rainsy-sam-2891a347/
The basic formula for the Potential Payback Period (PPP) for stock evaluation, is:
Integrating Additional Variables
To show that the PPP formula integrates three other important variables (expected market return, a
risk-free interest rate, and Beta as a measure of risk), we need to define the discount rate "r"
appropriately.
Defining the Discount Rate "r"
The discount rate "r" is typically calculated using the Capital Asset Pricing Model (CAPM), which
incorporates the expected market return, a risk-free interest rate, and Beta (β). The formula for "r" is:
Explanation
By substituting the CAPM formula for "r" into the PPP formula, the comprehensive nature of the PPP is
revealed:
Comprehensive PPP Formula
Thus, the real and definitive PPP formula integrates:
These components ensure the PPP provides a more precise and tailored measure of the investment payback
period, accounting for both growth potential and risk factors. The comprehensive nature of this formula
makes it superior to simpler versions that do not incorporate these additional variables.
This unprecedented analysis, scrutinized by ChatGPT's artificial intelligence, should catch the attention of all finance professionals and anyone interested in the stock markets. "The Beta-Adjusted Potential Payback Period (PPP) is a game-changer in stock evaluation. By integrating key variables into a single, comprehensive figure, it empowers investors with a nuanced, risk-adjusted measure, enhancing their ability to make informed, strategic decisions. This metric is poised to become an essential tool for modern financial analysis, revolutionizing how investors evaluate and manage their portfolios."
In the evolving landscape of stock evaluation, the Beta-Adjusted Potential Payback Period (in short "Potential Payback Period" or "PPP") stands out as a revolutionary tool. By incorporating multiple fundamental variables into a single metric, it offers a comprehensive, informative, precise, versatile, and practical measure for investors. Comprehensive Risk-Adjusted Evaluation • Integration of Key Variables: The PPP includes the P/E ratio, earnings growth rate, interest rate, and Beta, providing a holistic view of a stock’s potential. • Risk Adjustment: It adjusts the discount rate based on Beta, reflecting the stock's volatility relative to the market. This results in a more accurate assessment of risk and potential returns. Informative and Nuanced Insights • Time-Based Perspective: The PPP calculates how long it will take for an investor to potentially recover his/her investment in a stock through future earnings per share, considering both the time value of money and the stock's risk profile. The PPP is equal to the P/E ratio when there is no earnings growth, no discount rate, and no risk. • Balanced View: The PPP balances current valuation with future growth potential, offering a detailed understanding of a stock's performance. • Market Volatility: By including Beta, it accounts for market volatility, providing a realistic payback period. Higher Beta stocks show a longer payback period, reflecting higher risk. Precise Mathematical Foundation The PPP stands out for its mathematical precision. Unlike the PEG ratio, which relies on a rule of thumb, the PPP is grounded in rigorous mathematical logic. This precision ensures that all relevant factors—such as growth rates, interest rates, and market volatility—are accurately reflected in the payback period. This results in a more reliable and exact metric that provides investors with a clear and precise understanding of the stock’s risk-adjusted performance.
Versatility
The PPP formula can be adapted to remain meaningful and applicable even when the P/E ratio is not, such as
for start-ups and companies in turnaround situations incurring temporary losses. In such situations, the PPP
can still provide insights into these companies by considering expected future earnings growth and
discounting back to present value. This is done over as many years as it takes to equalize those future
discounted earnings with the share's current value.
Handy One-Figure Metric
• Simplicity: Despite its complexity, the PPP distills information into a single,
easy-to-understand figure, making it accessible to all investors.
• Comparability: It facilitates straightforward comparisons across different stocks,
helping identify the best risk-adjusted returns.
• Decision-Making: It supports informed investment decisions by offering a clear,
quantifiable measure of risk and return.
Comparisons with Traditional Metrics
• P/E Ratio: The P/E ratio is a static metric, failing to account for earnings growth or
risk. From the PPP formula, we can see that the P/E ratio is only a special case of the PPP in a purely
theoretical static world with no growth, no inflation, no interest rate, and no risk. The PPP dynamically
adjusts for these factors, providing a more accurate picture beyond comparison.
• PEG Ratio: While the PEG ratio tentatively adjusts the P/E ratio by the earnings growth
rate, it relies on a rule of thumb. In contrast, the PPP uses mathematical logic and precision to
incorporate growth and other variables.
The evolution from the P/E ratio to the PEG ratio, and finally to the PPP reflects an undeniable shift
towards more comprehensive and precise stock valuation metrics.
Concrete Examples of the Beta-Adjusted PPP
To illustrate the application of the PPP, consider the following table showcasing key metrics for several
AI-benefiting stocks as of July 2024:
- Most of these stocks appear "overvalued" based on their relatively high and disparate P/E ratios, which do
not take growth into consideration.
- They all seem "overvalued" on the basis of their PEG ratios, which are all over 1.
- Their valuation appears more homogenous and nuanced when using the Beta-Adjusted PPP, with an
overvaluation threshold of 15 corresponding to a stock internal rate of return of 5%.
- It is advisable to continuously update the data in the table and perform simulations for all variables,
especially the projected earnings growth rate, to which the PPP is very sensitive, this feature being a
reflection of the market behavior.
Revolutionary Impact on Stock Evaluation and Investment
The PPP not only provides a more precise evaluation but also revolutionizes stock evaluation by addressing
the limitations of traditional metrics like the P/E ratio and the PEG ratio. While the P/E ratio is static
and does not account for earnings growth, the PEG ratio only offers a rule of thumb adjustment for this
earnings growth. On the other hand, the PPP rigorously incorporates earnings growth in addition to other
crucial variables such as interest rates and stock volatility.
The PPP can transform investment strategies by enabling better risk management, optimized portfolio
allocation, and more accurate evaluations, leading to more stable, long-term returns. It is especially
valuable in today's volatile market environment, where understanding the interplay between growth potential
and risk is crucial.
Conclusion
The PPP is a game-changer in stock evaluation. By integrating key variables into a single, comprehensive
figure, it empowers investors with a nuanced, risk-adjusted measure, enhancing their ability to make
informed, strategic decisions. This metric is poised to become an essential tool for modern financial
analysis, revolutionizing how investors evaluate and manage their portfolios.
For more information on the PPP, please visit www.stockinternalrateofreturn.com
To the question: "In stock evaluation, between the P/E ratio, the PEG ratio and the Potential Payback Period (PPP) as explained at www.stockinternalrateofreturn.com, which metric seems the most meaningful, precise and reliable?" ChatGPT gives this answer: "In evaluating stocks, the Potential Payback Period (PPP) appears to be the most meaningful, precise, and reliable metric compared to the P/E ratio and the PEG ratio." Read the full explanation by ChatGPT at https://chatgpt.com/share/294601ab-81da-4689-9bfc-2b3222499186 On a very important point ChatGPT specifies that, compared to the PEG ratio, "the PPP is a superior metric in terms of rigor and reliability for adjusting the P/E ratio by incorporating the projected earnings growth rate." https://chatgpt.com/share/30290d3d-b430-44ad-b78c-da88daddaa8e Let’s apply the three available metrics to evaluate and compare the hottest stocks among those being propelled by the artificial intelligence revolution. ChatGPT has identified 10 most interesting stocks: Nvidia, Alphabet, Microsoft, Amazon, Meta Platforms, Advanced Micro Devices (AMD), Tesla, Palantir Technologies, Salesforce, Adobe. https://chatgpt.com/share/cecf8c8d-40ba-47da-b2b4-7bb60e996f3a
All sorts of simulations for all variables can be performed instantly at https://stockinternalrateofreturn.com/instant_calculations.html In the above table, interest rate r = 4.20% for all stocks.
Based on the P/E Ratio 1- Meta Platforms (22.5) 2- Alphabet (28.3) 3- Microsoft (33.7) As of July 2024, the average P/E ratio of the NASDAQ is around 33. Based on the PEG Ratio 1- Meta Platforms (1.07) 2- Alphabet (1.49) 3- Microsoft (1.87) The 10 stocks in the table are all "overvalued" with all PEG Ratios above one (PEG > 1). The above three stocks are the less "overvalued". Based on the PPP 1- Meta Platforms (10.25) 2- Alphabet (12.15) 3- Nvidia (12.39) When the long-term risk-free interest rate is at 4.20%, the PPP should not exceed 16 years, corresponding to a stock internal rate of return of also 4.20%, without taking into account any risk premium. According to ChatGPT, "The evolution from the P/E ratio to the PEG ratio and finally to the Potential Payback Period (PPP) reflects an increasing sophistication in stock valuation methods, each incorporating additional financial metrics to provide a more comprehensive assessment." https://chatgpt.com/share/b0e75570-53b1-4c28-ae90-513a37c436da Rainsy Sam
According to ChatGPT there is a recent progress in the field of stock evaluation leading to a new metric more reliable than the traditional P/E ratio. - First quote from ChatGPT: "The Potential Payback Period (PPP) developed by Rainsy Sam does represent a notable advancement in the field of stock evaluation. The PPP is a mathematical adjustment of the traditional Price Earnings (P/E) ratio to account for earnings growth rates and discount rates, providing a more comprehensive and dynamic measure of a stock's value." See entire text at https://chatgpt.com/share/efbf0ce3-3ec6-4595-9516-6dc838464416 - Second quote from ChatGPT: "While the P/E ratio provides a simple and quick assessment, the PPP offers a more detailed and realistic evaluation by incorporating growth and discount rates, making it a more reliable tool for investors looking to understand the true value and potential of their investments." See entire text at https://chatgpt.com/share/0394d2b2-419d-4133-af6e-ce4e1f8969b6
Advanced Micro Devices (AMD) and Micron
Technology (MU) are two interesting US semiconductor companies
involved in the Artificial Intelligence (AI) revolution. But they cannot be evaluated with the traditional
P/E ratio because they are incurring temporary losses or their earnings are currently negligible, being in a
turnaround situation.
The Potential Payback Period (PPP) is as an alternative stock evaluation metric when the traditional P/E
ratio is inapplicable such as in the cases of start-ups, temporarily loss-making companies or those in
turnaround situations.
Unlike the traditional P/E Ratio, which is a most simple tool that evaluates a stock based on the earnings
of a single year, the PPP does so on the basis of earnings generated over a much longer period, in fact,
over as many years as it takes to equalize those future earnings with the current share price. By doing so,
the PPP is a more comprehensive, forward-looking and stable evaluation tool that can be used to meaningfully
compare stocks in all situations.
Here are the examples of two companies with non-significant P/E ratios as of July 05, 2024 :
- Advanced Micro Devices (AMD) with a P/E ratio (TTM) of 171.90 / 0.691 = 248.77
- Micron Technology (MU) with a P/E ratio (TTM) of 131.60 / – 1.41 = – 93.33
Applying the above formula for special cases where earnings per share (EPS) are negative or close to zero in
the first years, we can see that the PPPs of Advanced Micro Devices (AMD) and Micron Technology (MU) –
respectively 11.17 and 11.56 – are comparable to those of other companies in the same industry, whereas no
significant comparisons can be made on the basis of their P/E ratios.
The PPPs of the seven other stocks in the above table are calculated by applying the basic PPP formula when
EPS > 0 :
Instant calculations can be performed at https://www.stockinternalrateofreturn.com/instant_calculations.html
In practice, the P/E ratio can take any value (up to infinity) or become meaninglessly negative, whereas the
PPP varies within a relatively narrow range of approximately 10–15 (years). These figures are significant,
realistic, and credible because of their reasonable order of magnitude and relative stability, demonstrating
the homogeneity and rationality of the financial market. The financial market confirms its rationality when
we use appropriate metrics.
The above table shows that Nvidia and Meta are the most attractive stocks of the list, with no
other stock
showing a PPP below 11 (years).
Further remark
Through various simulations we can see that the PPP is highly sensitive to any change in the earnings growth
rate "g".
The reflects the fact that the stock market is highly sensitive to changes in expected earnings growth
rates.
This explains why stock prices can be very sensitive to quarterly earnings revisions, which – through
extrapolations – can result in revisions in earnings growth rates over a period well beyond the quarters in
question.
Any new earnings growth rate "g" immediately and automatically modifies the PPP level, resulting in stock
price adjustments.
In any case, we must remember that the reliability and precision of any evaluation model, regardless of how
relevant it may be, depend on the reliability and precision of the data. For the PPP, the most sensitive
data is "g", the estimated earnings growth rate for the next two to three years (tacitly and temporarily
extrapolated beyond), which has to be updated according to the most relevant and recent information.
Rainsy Sam
The following article is entirely written by ChatGPT using Artificial Intelligence. “THE INNOVATIVE NATURE OF THE POTENTIAL PAYBACK PERIOD (PPP) AS A METRIC FOR STOCK EVALUATION”
I – Definition of the Potential Payback Period (PPP)
According to A.I.-based ChatGPT, "The Potential Payback Period (PPP) is a
concept for stock evaluation developed by Rainsy Sam. It is defined as the amount of time required to
equalize the current stock price with the sum of future earnings per share. It is a sophisticated tool that
refines the traditional Price/Earnings (P/E) ratio by incorporating projected earnings growth and adjusting
for interest rates. This makes the PPP a more dynamic and informative measure compared to the static P/E
ratio (…).
The PPP can be particularly useful in environments where the P/E ratio might be misleading due to high
growth rates or varying interest rates."
II – Evolution of metrics for stock evaluation
According to A.I.-based ChatGPT, "The evolution from the Price-to-Earnings
(P/E) Ratio to the Price/Earnings to Growth (PEG) Ratio, and finally to the Potential Payback Period (PPP)
reflects a shift towards more comprehensive and precise stock valuation metrics.
- The Price-to-Earnings (P/E) Ratio is straightforward and widely used, but its primary limitation is that
it does not account for the company's growth prospects. Therefore, a high P/E ratio could either indicate an
overvalued stock or a company with high future growth expectations, which can be ambiguous without further
context.
- To address the P/E ratio's limitations, the Price/Earnings to Growth (PEG) Ratio incorporates the earnings
growth rate into the evaluation, but it does so by just dividing the P/E ratio by the annual earnings growth
rate.
- The Potential Payback Period (PPP) advances this concept further by offering a more rigorous and
mathematically precise method of incorporating growth rates and discount rates into stock valuation. This
metric refines the P/E ratio by including both the growth rate (g) and a discount rate (r), which accounts
for inflation and the opportunity cost of investing in the stock.
In conclusion, the PPP represents a significant evolution in stock
valuation metrics by addressing the limitations of both the P/E and PEG ratios. It offers a more
comprehensive and precise approach, allowing for more meaningful comparisons and better investment
decisions. This progression from P/E to PEG to PPP demonstrates a trend towards integrating more
variables to enhance the accuracy and reliability of stock evaluations."
III – Relevance and accuracy of the formula for the Potential Payback
Period (PPP)
According to A.I.-based ChatGPT,the PPP formula elaborated by Rainsy Sam
"appears to be both relevant and accurate."
RELEVANCE AND ACCURACY
1) Relevance
- The PPP is designed to estimate the time it takes for an investment to pay back its initial cost, based on
the P/E ratio, growth rate, and interest rate.
- It is useful for investors who want to understand the potential timeframe for an investment to generate
returns that cover its initial cost, considering growth and interest rates.
2) Accuracy
- The formula combines logarithms to balance exponential growth effects from earnings and discounting
effects from interest rates.
- By using the logarithm, it accurately handles the multiplicative nature of growth and discounting,
providing a robust estimate of payback time.
In conclusion, the formula provided for the Potential Payback Period (PPP)
appears to be both relevant and accurate for estimating the time needed to recover an investment, taking
into account the P/E ratio, growth rate, and interest rate. It effectively captures the financial
dynamics involved in investment payback periods."
[End of quotes from ChatGPT]
For those interested in delving deeper into the details and examining concrete examples, the full insights
on the PPP from ChatGPT can be accessed at https://www.stockinternalrateofreturn.com/index.html
Rainsy SAM
According to A.I.-based ChatGPT "The Potential Payback Period (PPP) is a sophisticated tool for stock evaluation that refines the traditional Price/Earnings (P/E) ratio by incorporating projected earnings growth and adjusting for interest rates. It can be particularly useful in environments where the P/E ratio might be misleading due to high growth rates or varying interest rates (…). This makes PPP a more dynamic and informative measure compared to the static P/E ratio (…). The PPP can be used by taking into account a risk factor such as the Beta in a regression, as demonstrated in the attached graph. The graph shows a regression line that indicates an inverse correlation between PPP and the stock Beta. This approach integrates a risk factor by showing how the PPP metric varies with the stock’s Beta, allowing for a more comprehensive analysis that includes both return and risk considerations.”
Through sensitivity analyses that can be conducted at https://www.stockinternalrateofreturn.com/ you can change any assumptions as appropriate, according to your own estimates, especially those related to the projected earnings growth rates (g). To calculate the PPP you will just use in a more consistent and precise way the very same projected earnings growth rates (g) that you already use to calculate the Price-to-Earnings Growth (PEG) ratio. The above presentation is only a simplified example of a comparison and selection of stocks based on a regression line illustrating the inverse correlation between PPP and Beta. To make this approach more precise and operational, the sample of stocks considered should be as large as possible in each sector examined. In any case, a stock cannot be evaluated in an isolated, absolute, and static manner. Any absolute “price target” is misleading. The market actually evaluates stocks relative to one another in a system of relative prices, and this occurs continuously, as the market situation—and thus the relative value of each stock—constantly evolves. This is why we continuously monitor the "general trend" of the market, which can reverse at any moment and affects the price of each stock at every moment, even though the intrinsic quality of each individual stock may remain unchanged. For the reasons mentioned above, an investor who sets performance goals for each stock purchased should replace the "Price Target," determined in an absolute and static manner, with the "Upward Potential," determined in a relative and dynamic manner. Rainsy SAM
“In conclusion, the formula for the Potential Payback Period (PPP) appears to be both relevant and accurate for estimating the time needed to recover an investment, taking into account the P/E ratio, growth rate, and interest rate. It effectively captures the financial dynamics involved in investment payback periods.”
Our unique approach is based on the Potential Payback Period (PPP), a synthetic and dynamic metric that
combines the P/E ratio, the expected earnings growth rate, and a long-term interest rate to discount future
earnings to their present values.
By using a regression line showing an inverse correlation between the PPP and the stock Beta, our approach
also integrates a risk factor.
All the figures used in this presentation are sourced from Yahoo
Finance and Investing.com. Our conclusions
are drawn only by making the figures consistent.
As of June 14, 2024, among the nine companies, the most attractive stock in terms of PPP is NVIDIA (10.22),
followed by META (10.29) and SMCI (10.43).
Any comparison on the basis of the traditional P/E ratio would be meaningless.
Data as of June 14, 2024
Data as of June 14, 2024
Rainsy Sam
- TAIWAN (TAIEX) : 21 840.29 (+ 21.89 %) - JAPAN (NIKKEI 225) : 39 134.79 (+ 16.95 %) - USA (S&P 500) : 5 360.79 (+ 12.39 %) - GERMANY (DAX) : 18 360.11 (+ 9.60 %) - UNITED KINGDOM (FTSE 250) : 20 369.65 (+ 3.45 %) - FRANCE (CAC 40) : 7 799.26 (+ 3.39 %) Why have the stock markets of Japan and Taiwan outperformed other stock markets since the beginning of this year? I have identified the reasons -- at least the main ones -- for this development in the table below that I posted on LinkedIn on December 31, 2023. In this table (see following page), the main stock markets were evaluated based on the Potential Payback Period (PPP). This new metric for stock evaluation is an adjustment of the P/E ratio according to two fundamental variables that are very different from one country to another and are not taken into account in the traditional P/E ratio, namely the earnings growth rate and the interest rate. According to ChatGPT, which is based on artificial intelligence (AI), the PPP is a "sophisticated tool that refines the traditional P/E ratio" and "can be seen as an improvement over the P/E ratio." Rainsy Sam
"The Potential Payback Period (PPP) is a concept for stock evaluation developed by Rainsy Sam. [It] is a sophisticated tool that refines the traditional Price/Earnings (P/E) ratio by incorporating projected earnings growth and adjusting for interest rates. It can be particularly useful in environments where the P/E ratio might be misleading due to high growth rates or varying interest rates." "The Potential Payback Period (PPP) can be seen as an improvement over the P/E ratio, particularly for long-term investors interested in a more comprehensive and forward-looking assessment of a company’s value. By incorporating growth projections, PPP addresses some limitations of the P/E ratio, such as sensitivity to short-term earnings fluctuations and lack of consideration for future potential." For those interested in delving deeper into the details, the full insights on the PPP from ChatGPT can be accessed at https://www.stockinternalrateofreturn.com/AI_and_PPP.html
Please go to Rainsy Sam’s Website https://www.stockinternalrateofreturn.com/
ChatGPT explains how the Potential Payback Period (PPP) represents an improvement over the Price-Earnings (PE) Ratio.
Data as of April 17, 2024
Fundamental data (especially P/E Ratios and Earnings growth rates) are from Yahoo Finance exclusively, so as
to check their consistency. https://finance.yahoo.com/
“r” = Interest rate used as discount rate = 4.585 % (Yield on the US 10-year Treasury note)
EPS = Earnings per share (Trailing Twelve Months)
P/E Ratio = Price/Earnings Ratio = PER
“g” = Earnings growth rate estimate (“Next 5 Years per annum”)
PEG = Price/Earnings-to-Growth Ratio
PPP = Potential Payback Period or “Dynamic P/E Ratio”
Instant calculations at https://www.stockinternalrateofreturn.com/instant_calculations.html
Conflicting conclusions based on the three different metrics (PER, PEG and PPP): Figures indicating relative overvaluation are in red, undervaluation in green, and fair valuation in brown. The PPP proves to be most relevant in light of the 1-Year Change in stock prices. Rainsy Sam
As written in my latest post on LINKEDIN “Elaborating a Dynamic P/E Ratio” (April 11, 2024) https://www.linkedin.com/feed/update/urn:li:activity:7184191806899671040/ “The stock market is highly sensitive to any change in the expected earnings growth rate. It is not the growth rate itself or the speed (concept of "first derivative" in physics) that matters most, but its acceleration or deceleration (concept of "second derivative")”. From this perspective, the "good" is still ahead of us, but the "better" is already behind us. The Potential Payback Period (PPP), which is a kind of “Dynamic P/E Ratio”, is very sensitive to the earnings growth rate "g" in the formula
The latest figures for “g” indicate that the New York Stock Market as valued with the PPP, is getting relatively more and more expensive and that the end of the Bull Market is in view. Rainsy Sam
In the semiconductor and artificial intelligence sectors, how can we compare a temporarily loss-making
company such as Micron Technology (MU) with one of the “Magnificent Seven” such as Nvidia (NVDA)?
Investors often find themselves needing to evaluate companies for which the traditional P/E ratio cannot be
meaningfully calculated, at least temporarily, when losses are incurred or earnings are near zero. This is
particularly true for startups or companies in a turnaround situation, or those undergoing restructuring.
This is where the concept of "Potential Payback Period" (PPP) proves useful.
The PPP is defined as the period of time necessary for the sum of future earnings per share to equalize the
current share price. Future earnings are discounted to their present values to reflect inflation or
opportunity cost.
Unlike the traditional P/E ratio, which measures the value or "expensiveness" of the stock based on the
earnings of a single year, the PPP does so on the basis of earnings generated over a much longer period of
time, in fact over as many years as it takes to equalize those future earnings with the current share price.
Initially, the two concepts are quite similar. For example, a P/E ratio of 10 means it takes 10 years of
earnings per share to equalize or “potentially recover" the current stock price. However, this assumes no
earnings growth and no inflation over the years. In this case, P/E ratio = PPP, meaning the P/E ratio is the
PPP applied to a static world where there is no growth and no inflation, and it is also expressed in years,
like any "period."
For more realistic cases, the PPP adjusts the P/E ratio by introducing an earnings growth rate and an
interest rate used to discount future profits. This discount rate reflects inflation, but also an
opportunity cost, as the investor buying a stock forgoes the return offered by a less risky long-term bond.
Finally, the PPP appears as a generalization of the P/E ratio with possibilities to take into account
various and varying earnings growth rates and interest rates. Professor Emeritus of Finance at ESSEC (a top
French business school) Patrice Poncet considers the PPP to be a "nice generalization of the P/E ratio" and
that it represents an “undeniable improvement” in financial analysis.
If the P/E ratio is a snapshot based on earnings for a single year, the PPP is a video that captures the
evolution of these earnings in real terms over a more extended period, defined as the time required
("period") for the discounted future earnings flow to equal the current stock price. For this reason the PPP
can also be called “Dynamic P/E Ratio”.
The PPP is, in fact, a metric of a company’s profit-making capacity (or earnings potential), knowing that it
is this anticipated profit-making capacity over the medium and long term
that basically determines the share’s value in the stock market.
The advantages of the PPP are presented in detail at https://www.stockinternalrateofreturn.com/Advantages-of-ppp-irr.html
To calculate the PPP for Micron Technology and Nvidia we use the following formula:
Mathematical demonstrations at https://www.stockinternalrateofreturn.com/Mathematics.html
Share price and interest rate as of April 4, 2024 (Interest rate r = 4.308%).
Instant calculations of the PPP with all possible simulations can be performed at
https://www.stockinternalrateofreturn.com/instant_calculations.html
In conclusion, Micron Technology currently presents a PPP (or profit-making capacity) similar to that of
Nvidia (around 11.40 years of future earnings to potentially recover the current share prices), but the
former stock is riskier than the latter, with more earnings volatility in the past and less visibility in
the future.
Rainsy Sam
Micron Technology, Inc. designs, develops, manufactures, and sells memory and storage products worldwide. On December 25, 2023 we posted the following analysis :
https://www.linkedin.com/feed/update/urn:li:activity:7144960074296279040/ From December 21, 2023 to April 1, 2024, Micron Technology increased from $85.48 to $124.29 (+45.40%) while Intel Corp. decreased from $47.08 to $44.47 (– 5.54%).
You can perform instant calculations of the PPP with all possible simulations at https://www.stockinternalrateofreturn.com/instant_calculations.html While the P/E Ratio is still not applicable in the case of the two temporarily loss-making companies, Intel Corporation and Micron Technology, the latter is still relatively attractive in the semiconductor / Artificial Intelligence industry, with a PPP of only 10.86. If you want any stocks you hold to be freely evaluated on the basis of the PPP, just send us their names. You will quickly receive the corresponding analyses with relevant comparisons.
ACM Research, Inc., together with its subsidiaries, develops, manufactures, and sells single-wafer wet cleaning equipment for enhancing the manufacturing process and yield for integrated chips worldwide. https://finance.yahoo.com/quote/ACMR?.tsrc=fin-srch Data as of March 28, 2024 Price and Earnings per share (EPS) in US$
The Potential Payback Period (PPP) is a mathematical adjustment of the Price Earnings (PE) Ratio according to the earnings growth rate and the interest rate.
Instant calculations of the PPP with all possible simulations at https://www.stockinternalrateofreturn.com/instant_calculations.html The PPP is a synthetic metric because it combines three variables that are essential in stock evaluation, namely the PE ratio, the expected earnings growth rate, and the prevailing interest rate. It’s also a dynamic metric because, contrary to the static PE Ratio, it incorporates the earnings of several years to come through an estimated earnings growth rate. If you want any stocks you hold to be freely evaluated on the basis of the PPP, just send us their names. You will quickly receive the corresponding analyses with relevant comparisons.
Travelzoo, together with its subsidiaries, operates as an Internet media company that engages in the provision of travel, entertainment, and local deals from travel and entertainment companies, and local businesses worldwide. https://www.investing.com/equities/travelzoo Data as of March 27, 2024 Price and Earnings per share (EPS) in US$
The Potential Payback Period (PPP) is a mathematical adjustment of the Price Earnings (PE) Ratio according to the earnings growth rate and the interest rate.
The average PPP of the companies included in the S&P 500 amounts to 13.59. Instant calculations of the PPP with all possible simulations at https://www.stockinternalrateofreturn.com/instant_calculations.html If you want any stocks you hold to be freely evaluated on the basis of the PPP, just send us their names. You will quickly receive the corresponding analyses with relevant comparisons.
1- PE RATIO: 28.41 Mean: 16.06 Median: 15.00 Min: 5.31 (Dec 1917) Max: 123.73 (May 2009) Source: https://www.multpl.com/s-p-500-pe-ratio 2- EARNINGS YIELD: 3.52% (compared to Yield on US 10Y Treasury Note: 4.199%) Mean: 7.25% Median: 6.67% Min: 0.81% (May 2009) Max: 18.82% (Dec 1917) Source: https://www.multpl.com/s-p-500-earnings-yield 3- PRICE-TO-EARNINGS GROWTH (PEG) RATIO: 1.51 PE = 28.41 Earnings growth rate: + 18.8% 28.41 / 18.8 = 1.51 > 1.0, indicating overvaluation. Source for Earnings growth rate: https://lipperalpha.refinitiv.com/2024/02/sp-500-long-term-eps-growth-forecasts-reach-multi-year-high/ 4- SHILLER PE RATIO OR CYCLICALLY ADJUSTED PE (CAPE) RATIO: 35.0 Mean: 17.10 Median: 15.97 Min: 4.78 (Dec 1920) Max: 44.19 (Dec 1999) https://www.multpl.com/shiller-pe The Shiller PE Ratio created by Yale University Professor Robert Shiller – who received the Economics Nobel Prize in 2013 – is approaching a level that indicates a possible market crash. This metric is a variation of the traditional PE ratio that uses the ten-year average of inflation-adjusted earnings instead of single-year earnings. It helps assess whether the stock market – as represented by the S&P 500 – is overvalued or undervalued. The higher the ratio, the more overvalued a market. Over more than 100 years, the average and median Shiller P/E Ratio has been around 16 or 17, spiking up significantly higher often before market crashes. It reached an all-time high in December 1999 at 44.19. Based in part on that record high ratio, Shiller correctly predicted the market crash that occurred at the beginning of year 2000.
At 35.00 the Shiller P/E Ratio is alarmingly high. “(But) like many other metrics, (it) is backward-looking, based on historical performance figures, leading some critics to question its utility as the economy and countries’ economic policies (and companies’ financial prospects) evolve.” https://www.forbes.com/advisor/investing/shiller-pe-ratio/ 5- POTENTIAL PAYBACK PERIOD (PPP): 12.24 The Potential Payback Period (PPP) is a mathematical adjustment of the traditional Price Earnings (P/E) Ratio to incorporate the earnings growth rate and the interest rate in the stock evaluation process.
As of March 22, 2024 - PER = 28.41 - g = + 18.8% (Source: As indicated for the calculation of the PEG Ratio at Point 3) - r = 4.199% (Source: https://tradingeconomics.com/bonds) - PPP = 12.24 Instant calculations at https://www.stockinternalrateofreturn.com/instant_calculations.html Based on comparisons in time and space, a PPP of 12.24 is very reasonable and leaves ample room for further increase of the S&P 500 index. The forward-looking PPP – which is a kind of dynamic P/E Ratio – is the only metric to take into account the improving earnings prospects for US companies. See upward revisions of earnings growth rates at https://www.linkedin.com/feed/update/urn:li:activity:7169639808984678400/ Rainsy Sam
Data as of March 22, 2024 Price and EPS in Euros g : Earnings growth rate per annum r : Interest rate = 2.80%
The Potential Payback Period (PPP) is a mathematical adjustment of the Price Earnings (P/E) Ratio according to the earnings growth rate and the interest rate.
The average PPP for the French stock market currently exceeds 14.00. Instant calculations at https://www.stockinternalrateofreturn.com/instant_calculations.html If you want any stocks you hold to be freely evaluated on the basis of the PPP, just send us their names. You will quickly receive the corresponding analyses with relevant comparisons.
Data as of March 21, 2024 Price and EPS in Euros
The Potential Payback Period (PPP) is a mathematical adjustment of the Price Earnings (P/E) Ratio according to the earnings growth rate and the interest rate.
The average PPP for the French stock market currently exceeds 14.00. Instant calculations at https://www.stockinternalrateofreturn.com/instant_calculations.html If you want any stocks you hold to be freely evaluated on the basis of the PPP, just send us their names. You will quickly receive the corresponding analyses with relevant comparisons.
The three possible metrics are 1) The traditional Price-to-Earnings Ratio (PER) 2) The Price-to-Earnings Growth (PEG) Ratio
3) The Potential Payback Period (PPP)
On April 25, 2023, the well-known investor Peter Lynch -- who popularized the PEG in the 1980s – “expressed regret for not buying into NVIDIA,” probably because he found the stock overvalued on the basis of the PEG.
On October 7, 2023, I made the following recommendation on NVIDIA :
On February 2, 2024, I further explained my opinion by comparing the “Magnificent Seven” stocks on the basis of their PPPs. NVIDIA appeared as the most attractive stock with the lowest PPP (10.04).
Evaluation of NVIDIA using the three metrics as of February 2, 2024. The three metrics yield three different conclusions: 1) P/E Ratio = 86.94. The stock is markedly OVERVALUED. 2) PEG = 86.94 / 50 = 1.74 ( > 1). The stock is still OVERVALUED. 3) PPP = 10.04. The stock is UNDERVALUED. In his book "One up on Wall Street" published in 1989, Peter Lynch wrote: "The P/E ratio of any company that's fairly priced will equal its (earnings) growth rate", meaning a fairly valued company will have its PEG equal to 1. If this metric shows a figure higher than 1, the company is considered “overvalued.” The earnings growth rate must be closely followed and immediately rectified whenever applicable. Rainsy Sam
- Last week, on March 6, 2024, I posted "NVIDIA and SMCI are the two best artificial intelligence stocks" and I urged investors to use "The Potential Payback Period (PPP): A unique tool for stock selection." https://www.linkedin.com/feed/update/urn:li:activity:7171291486553104384/ - On February 17, 2024, using the PPP approach, I pointed to the main "US stocks that will most benefit from the AI revolution".
https://www.linkedin.com/feed/update/urn:li:activity:7164769504101658624/ - On February 11, 2024, I posted " (Based on the PPP) SMCI is the second most attractive AI stock". https://www.linkedin.com/feed/update/urn:li:activity:7162484219326222336/ - On February 7, 2024, I posted "Another earnings simulation leads to new price target for NVIDIA : $1,200." Without any downward revisions in earnings estimates, investors should wait for this price target to be reached this year. https://www.linkedin.com/feed/update/urn:li:activity:7160979050881052673/ - On October 7, 2023, I posted " NVIDIA: A strong buy on the basis of the PPP. Among the US major high-growth stocks NVIDIA is the most attractive in terms of PPP, even though with the highest P/E ratio”. NVIDIA share price was then $457.62. A 100% increase since. https://www.linkedin.com/feed/update/urn:li:activity:7116790087434035200/ See all my recent articles at https://www.stockinternalrateofreturn.com/latest_articles.html Rainsy Sam
The company stock is the “most expensive” and, at the same time, the “cheapest” in the world. The “most expensive” in that its P/E ratio is equal to infinity (with the company currently achieving 0 profit), the “cheapest” in that its price does not exceed 1 dollar (or 1 euro). However, the stock could prove to be a very interesting investment. French-based CGG (formally Compagnie Générale de Géophysique – Veritas) provides data, products and services in Earth science, data science, sensing and monitoring for a wide range of industries and activities ranging from geologic studies to seismic surveys to natural resources exploitation to infrastructure construction to energy transition.
Because the P/E ratio amounting to infinity is not applicable here, we need to use the concept of the Potential Payback Period (PPP) as explained in the article titled “How to evaluate stocks when the P/E ratio becomes irrelevant in the cases of startups and turnaround situations (when EPS < 0 or EPS ≃ 0)” https://www.stockinternalrateofreturn.com/Startups.html The PPP is a mathematical adjustment of the P/E ratio according to the varying earnings growth rate and interest rate. If we consider the P/E ratio as a snapshot that is frozen on the profit of a single year, the PPP can be compared to a video that captures the flow of profits over a large number of years (as many years as it takes to equalize this future profit flow with the current stock price). Unlike the P/E ratio, which can lose all meaning for certain stocks during certain periods, the PPP is a synthetic and dynamic – more logical and more stable – metric that remains always meaningful in space and time and can always be used for stock comparison.
Price as of March 12, 2014 EPS = Earnings per share g = Expected earnings growth rate per annum after 2025 r = Long-term and risk-free interest rate PPP = Potential Payback Period Instant calculations of the PPP at https://www.stockinternalrateofreturn.com/instant_calculations.html
Considering CGG’s field of activities, a PPP – which is a kind of refined P/E ratio – of 4.76 makes the company rather attractive.
Surprisingly, Air France, the country’s flag carrier, despite regaining profitability since 2022, improving financial health and demonstrating promising profit prospects, is unjustifiably the cheapest French company with a P/E ratio of only 3. Even certain political and social risks fail to justify such an undervaluation. AIR FRANCE share price as of March 8, 2024: €9.71 EPS: €3.14 P/E Ratio (“PER”): 3.09 Expected earnings growth rate (“g”): +7% per annum Interest rate (“r”): 2.72% Potential Payback Period (“PPP”): 2.97
The PPP is basically a mathematical adjustment of the P/E Ratio to the expected earnings growth rate. Instant calculations of the PPP at https://www.stockinternalrateofreturn.com/instant_calculations.html
SAFRAN share price as of March 8, 2024: €195.44 EPS: €4.69 P/E Ratio: 41.67 Expected earnings growth rate: +28% per annum Interest rate: 2.72% PPP: 11.00
The Potential Payback Period (PPP) is a mathematical adjustment of the P/E ratio according to the varying earnings growth rate. It’s a synthetic and dynamic metric for stock selection which is understandably showing an astonishing efficacy, especially with high-growth stocks like those propelled by the revolution of artificial intelligence (AI).
On October 7, 2023, we recommended: “NVIDIA: A strong buy on the basis of the PPP. Among the US major high-growth stocks, NVIDIA is the most attractive in terms of PPP, even though with the highest P/E ratio.” https://www.linkedin.com/feed/update/urn:li:activity:7116790087434035200/ NVIDIA stock price: +93.82% from October 7, 2023 ($457.62) to March 6, 2024 ($874.00).
On February 9, 2024, we pointed: “SMCI: Second most attractive AI stock. Among the artificial intelligence-propelled stocks, SMCI is the second most attractive after NVIDIA. This conclusion is based on the PPP, which is a unique tool to evaluate and compare high-growth stocks with very high P/E ratios. https://www.linkedin.com/feed/update/urn:li:activity:7162484219326222336/ SMCI stock price: +51.92% from February 9 ($740.29) to March 6, 2024 ($1,124.70).
Data as of February 9, 2024 g = Earnings growth rate r = Interest rate = 4.16% PPP = Potential Payback Period
Instant calculations at https://www.stockinternalrateofreturn.com/instant_calculations.html
Sam Rainsy
This inspiring article was published on March 1, 2024 The Roaring 1990s vs The Roaring 2020s By Edward Yardeni https://www.linkedin.com/pulse/roaring-1990s-vs-2020s-edward-yardeni-psvme/
“There is a big jump reflecting upward revisions in the long-term prospects for the growth rate of the MegaCap-8 companies (i.e., Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, Nvidia, and Tesla) following great earnings reports by some of them recently. The long-term earnings growth rate (LTEG) of the MegaCap-8 is up from 13.4% during the January 31, 2023 week to 38.9% during the February 23, 2024 week.”
This is my comment: But what is the real impact of an increase in the LTEG on the evaluation of the MegaCap-8 companies? From Jan 31, 2023 to Feb 23, 2024, the LTEG increased from 13.4% to 38.9%. But the Forward P/E also increased from 22.0 to 28.0 because of the increase in share prices. This increase in the P/E may lead to believe that the shares have become more “expensive”. But over the same period, with the same LTEG increase, the Potential Payback Period (PPP) decreased from 12.42 to 8.13 despite the increase in share prices. This shows that the shares have become actually less “expensive”, which better explains the continuous bull market since. The impact of a LTEG increase is better felt with the PPP than with the Forward P/E because the former covers a longer period than the latter. The PPP is a synthetic and dynamic metric for stock evaluation that mathematically adjusts the P/E ratio according to varying earnings growth rates and interest rates. Professor Emeritus of Finance at ESSEC (a top French business school) Patrice Poncet considers the PPP to be an “undeniable improvement” in financial analysis. More information at https://www.stockinternalrateofreturn.com/Advantages-of-ppp-irr.html
Instant calculations at https://www.stockinternalrateofreturn.com/instant_calculations.html Rainsy Sam
The Potential Payback Period (PPP) is a mathematical adjustment of the P/E Ratio according to varying earnings growth rates and interest rates. It’s a synthetic and dynamic metric in stock evaluation whose relevance and efficacy are being proven. Professor Emeritus of Finance at ESSEC (a top French business school) Patrice Poncet considers the PPP to be an “undeniable improvement” in financial analysis. More information at https://www.stockinternalrateofreturn.com/Advantages-of-ppp-irr.html Send us the name of any company, in any sector, any country, and we will produce exclusively for you a free evaluation like the one below titled “Stock selection among the nine largest semiconductor companies in Japan”. Taking into account a risk factor and the visibility of each company, we can confirm that TOKYO ELECTRON is the most attractive stock in its sector. But RENESAS ELECTRONICS, with the lowest PPP in the sector, is particularly undervalued and its earnings could grow faster than presently expected. If you want any stocks you are holding now to be also evaluated on the basis of the PPP, just send us their names. We can respond directly and privately to you.
Instant calculations at https://www.stockinternalrateofreturn.com/instant_calculations.html
Advanced Micro Devices, Alphabet, Amazon, Apple, Applied Materials, Broadcom, Intel, Meta, Microsoft, Nvidia, Palantir Technologies, Qualcomm, Super Micro Computer, Tesla, Texas Instruments Data as of February 16, 2024 Yield on U.S. 10-Year Treasury Note: 4.28% P/E Ratios in descending order g = Earnings growth rate per annum
- Companies above the regression line are overvalued : Advanced Micro Devices (AMD), Broadcom, Apple, Qualcomm, Microsoft, Texas Instruments. - Companies on the regression line are fairly valued : Amazon, Tesla. - Companies below the regression line are undervalued : Nvidia, Super Micro Computer, Meta, Alphabet, Intel, Palantir Technologies, Applied Materials. Nvidia could rise from $726 up to $1850 (+155%) and Super Micro Computer from $803 to $1900 (+135%) within one to two years if the earnings forecasts are materialized. Most data are from Yahoo Finance https://finance.yahoo.com/quote/TXN?p=TXN&.tsrc=fin-srch Simulations on earnings growth rates can be conveniently made by using this program for instant calculations : https://www.stockinternalrateofreturn.com/instant_calculations.html This approach is based on the concept of the Potential Payback Period (PPP). The PPP is a mathematical adjustment of the P/E Ratio according to the expected earnings growth rate “g”, with a given interest rate “r”.
More explanation of the PPP at https://www.stockinternalrateofreturn.com/Advantages-of-ppp-irr.html The end product of the approach is represented by the regression line showing the relationship between the PPP and the Beta as a risk factor. This regression line is a synthetic stock selection tool that combines several fundamental factors that are essential in the determination of the stock value: the P/E ratio, the company’s profit-making capacity (or earnings potential) through the earnings growth rate, a long-term risk-free interest rate and the Beta as a measure of the risk associated with the stock. This dynamic approach is based on a system of relative prices where the value of each stock is determined relative to that of other stocks at a given moment. Rainsy Sam Investment manager Former Cambodian Finance Minister
SINCE THE BEGINNING OF 2024, JAPAN AND TAIWAN STOCK MARKETS, WHICH WERE IDENTIFIED AS PRESENTING THE HIGHEST “RISK PREMIUM” AT THE END OF 2023, HAVE ACHIEVED THE BEST PERFORMANCES
A similar table with data as of December 28, 2023 was posted last year, with relevant explanation, at https://www.stockinternalrateofreturn.com/Stock-Market-Comparison.html
A stock's Internal Rate of Return (IRR) is to be compared with the yield of a long-term risk-free bond,
with
the difference between the two rates being the risk premium specific to each stock or stock market as a
whole. The risk premium may not be fully justified. At a given moment, it may be considered too high or
too
low, leading to corrective movements.
The concept and the advantages of the PPP and the IRR are explained in detail at
https://www.stockinternalrateofreturn.com/Advantages-of-ppp-irr.html
The reliability of these forecasts based on the concepts of
PPP
and IRR depends on the reliability and
accuracy of the forecasted data entered into the model, particularly the projected earnings growth
rate
for
the next 12 to 36 months. Any revision of earnings outlook in a stock market will lead to a
re-evaluation of
that market compared to other stock markets through a modification in the risk premium ranking.
Political
risk is put aside in this analysis which supposes “all else being equal”.
P/E Ratio = PER = Price Earnings Ratio.
g = Projected earnings growth rate for the next two or three
years.
r = Long-term interest rate on a risk-free bond (such as the
U.S.
10-Year Treasury Note).
PPP = Potential Payback Period. This is the time needed for the
investment in the purchase of a stock to be
"potentially paid back" through future profits progressing at rate "g" and discounted at rate "r".
IRR = Internal Rate of Return. This is the discount rate that must be applied to future profits made over the period corresponding to the PPP for these profits to equalize the current stock price. The IRR formula is directly derived from the PPP.
See mathematical demonstrations at
https://www.stockinternalrateofreturn.com/Mathematics.html
Source of data: The figures for P/E Ratio (excepted for
France’s) and projected earnings growth rates "g"
come from Simply Wall St at https://simplywall.st?via=rainsy
Because of continuous upward earnings revisions in the USA, the expected average earnings growth rate
for
that market (S&P 500) is revised from 15% to 20% per annum.
Rainsy Sam
Among artificial intelligence-propelled stocks, “Super Micro Computer” is the second most attractive after “Nvidia”. This conclusion is based on the Potential Payback Period (PPP) which is a tool that can be used to help evaluate and compare AI stocks with very high P/E Ratios.
Data as of February 09, 2024
Raw data from Yahoo Finance https://finance.yahoo.com/quote/TXN?p=TXN&.tsrc=fin-srch
Yield on U.S. 10-Year Treasury Note: 4.16%
P/E Ratios in descending order. The P/E Ratio varies from 1 to 15, but the PPP
which adjusts the P/E Ratio
according to the earning growth rate, only varies from single to double.
g = Earning growth rate per annum
Instant calculations at https://www.stockinternalrateofreturn.com/instant_calculations.html
For better stock comparisons the P/E ratio (PER) should be replaced with the Potential Payback Period (PPP) which is a mathematical adjustment of the P/E Ratio according to the expected earnings growth rate “g”, with a given interest rate “r”.
Instant calculation of the PPP at https://www.stockinternalrateofreturn.com/instant_calculations.html More explanation of the PPP at https://www.stockinternalrateofreturn.com/Advantages-of-ppp-irr.html CONCRETE EXAMPLES With the above formula we can rigorously prove that “TEXAS INSTRUMENTS” with a P/E Ratio of 23 is actually more expensive than “SUPER MICRO COMPUTERS” with a P/E Ratio of 57, and also more expensive than “NVIDIA” with a P/E Ratio of 95. This is due to the differentials in expected earnings growth rates: +10% for “TEXAS INSTRUMENTS”, +40% for “SUPER MICRO COMPUTERS” and +50% for NVIDIA, to be very cautious for the two last stocks. Data as of February 09, 2024 Source: Yahoo Finance https://finance.yahoo.com/quote/NVDA?p=NVDA&.tsrc=fin-srch
Data as of February 09, 2024 Raw data from Yahoo Finance https://finance.yahoo.com/quote/TXN?p=TXN&.tsrc=fin-srch Yield on U.S. 10-Year Treasury Note: 4.16%
Instant calculations at https://www.stockinternalrateofreturn.com/instant_calculations.html Rainsy Sam
(+50% per year instead of +70% in our previous analysis, or even +100% for many analysts)
NVIDIA Earnings growth rate Source: Yahoo Finance https://finance.yahoo.com/quote/NVDA/analysis?p=NVDA
See more details on the PPP at
https://www.stockinternalrateofreturn.com/Advantages-of-ppp-irr.html
Earnings growth rate (g) = + 50% per annum (instead of +70% in our previous analysis).
Interest rate (r) = 4.02% (no change).
Beta 5Y Monthly) = 1.68 (no change).
PPP based on the Regression Line = (-1.2635 X 1.68) + 13.75 = 11.63 (instead of 8.20 in our previous
analysis).
P/E Ratio based on the Regression Line = 157.5 (instead of 388 in our previous analysis).
EPS = 7.61 (no change).
Price Targe = 157.5 X 7.61 = $1.198
(instead of $2,952 in our previous analysis).
Sam Rainsy
Data as of Friday, February 02, 2024
Yield on U.S. 10-year Treasury bond : 4.02%
See more details on the PPP at
https://www.stockinternalrateofreturn.com/Advantages-of-ppp-irr.html
NVIDIA’s "objective price" can be determined from a regression line as follows:
DETERMINATION OF THE "OBJECTIVE PRICE" FOR NVIDIA STOCK
RELATIVE TO SIX OTHER STOCKS AMONG THE "MAGNIFICENT SEVEN"
BASED ON THE ABOVE REGRESSION LINE WITH FORECASTS AVAILABLE AS OF FEBRUARY 02, 2024
(MOST FIGURES ARE FROM YAHOO FINANCE https://finance.yahoo.com/quote/NVDA/)
Formula of the Regression Line: PPP = – 1.8879 Beta + 14.321
NVIDIA’s Beta (5Y Monthly) = 1.64 ——> PPP = 11.2248 ——> P/E Ratio = 388
EPS = 7.61 ——> Price = 2,952 versus 661.60 on February 02, 2024 (X 4.46 times)
Rainsy Sam
Membre de la SFAF
Ancien Ministre des Finances du Cambodge
