References 1. Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley. 2. Graham, B., & Dodd, D. (2008). Security Analysis (6th ed.). McGraw-Hill. 3. Solow, R. M. (1956). A Contribution to the Theory of Economic Growth. Quarterly Journal of Economics, 70(1), 65–94. 4. Fama, E. F., & French, K. R. (1992). The Cross-Section of Expected Stock Returns. Journal of Finance, 47(2), 427–465. 5. Lakonishok, J., Shleifer, A., & Vishny, R. W. (1994). Contrarian Investment, Extrapolation, and Risk. Journal of Finance, 49(5), 1541–1578. 6. Greenwald, B. C., et al. (2001). Value Investing: From Graham to Buffett and Beyond. Wiley Finance. 7. Shiller, R. J. (2015). Irrational Exuberance (3rd ed.). Princeton University Press. 8. Yahoo Finance (2024). Company Financials: NVIDIA Corporation (NVDA). https://finance.yahoo.com/ 9. U.S. Department of the Treasury (2024). Daily Treasury Yield Curve Rates. https://home.treasury.gov/ 10. Sam, R. (2023–2025). The Potential Payback Period (PPP) and Stock Internal Rate of Return (SIRR): A New Framework for Valuing Equities. Website. https://www.stockinternalrateofreturn.com/ 11. Sam, R. (2025). SIRRIPA: The Stock-Tailored Yield to Maturity (YTM) and the Emergence of a Cross-Asset Valuation Metric. Preprints. https://doi.org/10.20944/preprints202504.1934.v1 12. Sam, R. (2025). Why SIRRIPA is Set to Replace the P/E Ratio in Modern Equity Valuation. Preprints. https://www.preprints.org/manuscript/202504.1213/v1 13. Sam, R. (2025). SIRRIPA: A Groundbreaking Return Metric to Value Stocks Just Like Bonds — Bringing Bond-Like Precision and Risk Rationality to Equity Valuation. Zenodo. https://doi.org/10.5281/zenodo.16285323 14. Sam, R. (2025). Beyond Valuation: The Four PPP-Derived Return Metrics and Their Role in Modern Equity Analysis. Zenodo. https://doi.org/10.5281/zenodo.16155541
By Rainsy Sam International Management School Geneva (IMSG) Date: July 21, 2025 Abstract Traditional equity valuation tools—such as the P/E ratio, PEG ratio, Dividend Yield, and DCF models—struggle to integrate time, growth, and risk into a unified return framework. In contrast, bond markets rely on yield-based metrics like Yield to Maturity (YTM), which express return in fully time-adjusted, risk-sensitive terms. This paper introduces the Stock Internal Rate of Return Including Price Appreciation (SIRRIPA), a yield-based metric that applies the same logic to equity valuation. Derived from the Potential Payback Period (PPP), SIRRIPA measures a stock’s total expected return by combining discounted earnings and terminal value within a coherent, finite-horizon framework. By interpreting EPS as equivalent to bond coupons and the Exit Price as a redemption value, SIRRIPA aligns equity valuation with fixed-income standards—enabling direct cross-asset comparison. The paper presents SIRRIPA’s mathematical foundations, theoretical rationale, and practical implications, offering a modern, yield-centered approach to stock valuation. Keywords Equity Valuation; SIRRIPA; Potential Payback Period (PPP); Internal Rate of Return; Yield to Maturity; P/E Ratio; Gordon-Shapiro Model; Discounted Cash Flow; Risk-Free Rate; Stock Risk Premium; Cross-Asset Comparison; Earnings Yield; Terminal Value.
1. Introduction In financial analysis, valuation is both an art and a science—but increasingly, it must also be a discipline of comparability, consistency, and time-sensitive logic. Investors, analysts, and policymakers are tasked with allocating capital in a world where earnings are volatile, growth is nonlinear, and risk evolves rapidly. Yet the dominant tools used to value equities remain largely unchanged: the Price-to-Earnings (P/E) ratio, the PEG ratio, Dividend Yield, and variants of Discounted Cash Flow (DCF) models. These metrics, while familiar and widely applied, are incomplete, fragmented, or static. They often fail to integrate the critical dimensions of valuation: growth, risk, and time. By contrast, bond markets long ago adopted a yield-centric approach—anchored in present value mathematics and standardized by the Yield to Maturity (YTM) framework. This allows bondholders to evaluate total expected return over time with clarity and consistency. No equivalent structure has been established in equity markets, despite decades of theoretical and empirical progress. As a result, stock valuation continues to rely on partial indicators, backward-looking multiples, and subjective forecast assumptions. This article addresses that gap by introducing the Stock Internal Rate of Return Including Price Appreciation (SIRRIPA)—a return metric derived from the Potential Payback Period (PPP) framework. SIRRIPA enables equity investors to calculate a bond-equivalent yield that integrates a stock’s earnings growth trajectory, risk-adjusted discounting, and expected terminal value into a single, time-bound rate of return. It offers the internal consistency of DCF logic, the interpretability of a yield-based metric, and the structural comparability needed for multi-asset portfolio decisions. Building on prior foundational work [19–23 ], the PPP methodology reconceptualizes the P/E ratio as a special case of a more general, time-sensitive valuation model [1][2][7][10]. From this foundation, SIRRIPA emerges as a natural extension—allowing equities to be assessed and compared in the same way that bonds, real estate, and private investments are commonly evaluated: through forward-looking, risk-adjusted internal rates of return [3][4]. The remainder of this article is structured as follows:
• Section 2 critically reviews the limitations of traditional stock valuation metrics;
• Section 3 introduces the mathematical foundation of PPP and derives SIRRIPA;
• Section 4 discusses the central role of the risk-free rate in cross-asset valuation;
• Section 5 draws structural parallels between equity and bond cash flows;
• Section 6 explores the practical, theoretical, and policy implications of adopting SIRRIPA;
• Section 7 concludes by framing SIRRIPA as the transition from static multiples to dynamic, yield-based
equity valuation.
By unifying the treatment of return across asset classes, SIRRIPA offers not only a new valuation metric, but a conceptual bridge—one that redefines how stocks are analyzed in the era of integrated financial decision-making.
2. The Limitations of Traditional Stock Return Metrics
For decades, equity valuation has relied on a suite of traditional metrics and models—most notably the
Price-to-Earnings (P/E) ratio, the PEG ratio, Dividend Yield, Discounted Cash Flow (DCF) models, and the
Gordon-Shapiro Model. Each offers a partial lens through which to evaluate a stock’s investment appeal. Yet
despite their enduring popularity, these tools share important limitations: they struggle to consistently
account for the combined effects of growth, risk, and time, and often yield results that are difficult to
compare across companies, sectors, or asset classes.
This section critically examines the structural flaws and conceptual boundaries of these valuation
approaches. While each has contributed meaningfully to the development of financial analysis, their
shortcomings underscore the need for a more integrated framework—one that measures return with greater
precision, aligns with time-based financial logic, and enables direct comparison with other asset classes.
These goals motivate the development of the SIRRIPA framework, which is introduced in subsequent sections as
a modern solution to the limitations outlined here.
2.1. The P/E Ratio: Static and Growth-Blind
The Price-to-Earnings (P/E) ratio expresses how much investors are willing to pay for each dollar of current
earnings:
While intuitive, the P/E ratio is static. It reflects neither earnings growth nor the time required to
recover one’s investment. It also fails to adjust for differences in risk across firms or sectors. Moreover,
it becomes undefined or misleading for companies with negative or near-zero earnings, rendering it unusable
for a significant portion of the market.
As shown in [7], the P/E ratio can be derived as a limiting case of a more general valuation model when both
growth and discounting are ignored. While this provides useful intuition, it also reveals how narrowly the
P/E ratio is defined—and how little it captures of a stock’s underlying economics.
2.2. The PEG Ratio: A Flawed Growth Adjustment
The PEG ratio attempts to improve upon the P/E ratio by adjusting for earnings growth:
This heuristic is popular for identifying so-called “growth at a reasonable price” (GARP) opportunities.
However, the PEG ratio lacks theoretical grounding. It is dimensionally inconsistent, ignores time value,
and assumes that growth has linear, perpetual effects on valuation. It also treats all growth as
risk-neutral and equally valuable, which oversimplifies the reality of capital markets.
Without specifying when earnings will grow—or how that growth will be monetized—the PEG ratio offers little
in the way of actionable insight. As argued in [5] and [9], its growth adjustment lacks internal consistency
and cannot support rigorous valuation under dynamic conditions.
2.3. Dividend Yield: A Narrow View of Returns
The Dividend Yield focuses exclusively on cash distributions:
While useful in income-oriented strategies, this metric overlooks retained earnings, which are often
reinvested to drive future value creation. It also ignores capital appreciation and fails to account for
payout volatility or discretionary changes in dividend policy. In effect, it measures only a subset of total
return—and assumes that distributions are more valuable than reinvestment.
As demonstrated in [14] and [15], firms with low or zero dividend yields can still offer strong forward
returns when retained earnings are reinvested efficiently. Dividend Yield, though relevant in specific
contexts, provides too narrow a lens for evaluating total shareholder value.
2.4. DCF Models: Conceptually Sound, Practically Inconsistent
Discounted Cash Flow (DCF) models attempt to capture intrinsic value by summing the present value of
expected future cash flows. While grounded in first principles, they are vulnerable to several structural
weaknesses in practice:
• Discount rates are often arbitrarily assigned, rather than derived from firm-specific risk profiles.
• Time horizons are subjectively fixed, typically without regard to industry dynamics or business cycles.
• Terminal values are speculative, and frequently dominate the valuation outcome.
These issues reduce comparability, make DCFs prone to manipulation, and impair decision-making—especially
when models are used in isolation.
As discussed in [12], more recent approaches suggest anchoring valuation models in time-based recovery
logic, thereby replacing arbitrary inputs with parameters that reflect actual earnings progression and
risk-adjusted capital recovery. Such refinements improve the applicability and interpretability of
DCF-derived insights, particularly when paired with structurally consistent assumptions.
2.5. No Framework for Unified Comparison with Bonds
The most fundamental shortcoming shared by all the above metrics is their incompatibility with fixed-income
valuation standards. Bonds are valued using Yield to Maturity (YTM), which integrates periodic interest
payments and principal recovery over time into a single, risk-adjusted return.
By contrast, equity valuation tools:
• Lack a unified time dimension,
• Fragment earnings and price appreciation,
• Do not yield a comparable rate of return.
As a result, investors cannot meaningfully compare a stock priced at a 25x P/E to a bond yielding 6%, even
if both have similar risk profiles. There is no shared valuation framework.
This asymmetry has long hindered cross-asset portfolio construction. As noted in [3] and [4], the absence of
a yield-like return metric for stocks is a critical gap—one that limits rational allocation decisions and
prevents coherent multi-asset optimization.
2.6. The Gordon-Shapiro Model: Elegant but Constrained
Among traditional models, one framework has stood out for its theoretical clarity and structured use of
discounting: the Gordon-Shapiro Model. It integrates growth and required return in a closed-form valuation
formula and offers a foundation for understanding intrinsic value. Yet, even this model fails to provide a
return-centric perspective or a framework suitable for dynamic or non-dividend-paying companies. Its
limitations further underscore the need for more adaptable and time-sensitive approaches.
The Gordon-Shapiro Model, or Gordon Growth Model (GGM), offers a closed-form solution for valuing a stock
based on perpetually growing dividends:
This model is conceptually elegant and widely taught, yet constrained in application. It assumes:
• All earnings are paid as dividends, excluding reinvestment as a driver of value,
• Constant growth in perpetuity, which is rarely realistic,
• No explicit investment horizon, offering no insight into capital recovery or interim return.
It also becomes unstable as g → r, leading to disproportionately large or erratic valuations. As discussed
in
[17], and further elaborated in [18], the model offers theoretical clarity but lacks operational flexibility
in
settings where dividend policies are inconsistent, growth is nonlinear, or valuation must be anchored to
recovery dynamics rather than perpetual assumptions.
While the GGM may remain useful for mature, high-yielding firms with stable financial profiles, its
simplifying assumptions make it increasingly unsuitable for evaluating modern growth companies or for
aligning valuation logic with time-based investment decision frameworks.
Conclusion of Section 2
Traditional valuation metrics—though foundational to financial analysis—fall short in capturing the
interdependence of earnings, risk, time, and return. They tend to:
• Fragment shareholder value into separate components,
• Depend on static or overly simplified assumptions,
• Lack time-based comparability across asset classes.
As a result, they offer incomplete answers to the investor’s central question: What return can I expect,
and
over what timeframe, given this stock’s growth, risk, and valuation?
These limitations point to the need for a return-centric, time-sensitive framework—one capable of unifying
valuation logic across both stocks and bonds. The development of SIRRIPA addresses this need by
incorporating capital recovery, discounting, growth, and terminal value into a single, yield-like return
measure. Its formal construction begins in the next section.
3. From PPP to SIRRIPA: Foundations of the Metric
The Potential Payback Period (PPP) and its associated return metrics—SIRR and SIRRIPA—form the core of a
dynamic valuation framework designed to address the limitations of traditional stock valuation tools. This
framework introduces time and risk explicitly into the analysis, allowing investors to determine how long it
will take for a stock’s cumulative discounted earnings to repay its purchase price, and what internal rate
of return this implies.
While the P/E ratio remains a useful starting point for assessing valuation, it is static and blind to
growth, risk, and reinvestment dynamics. In contrast, PPP generalizes the P/E by embedding these dimensions,
and SIRRIPA extends it further by expressing valuation in the form of a yield-based return metric
structurally analogous to bond Yield to Maturity (YTM).
3.1. The Logic Behind the Potential Payback Period (PPP)
The PPP answers a fundamental question in valuation:
How long does it take for an investor to recover their initial stock purchase through cumulative, discounted
earnings per share (EPS)?
The answer depends on:
• The initial P/E ratio,
• The expected earnings growth rate over time,
• The discount rate used to reflect risk and time value of money.
To capture these dynamics, the PPP formula is defined as:
where:
• P/E is the price-to-earnings ratio,
• g is the expected initial earnings growth rate,
• r is the discount rate (typically derived from CAPM).
As demonstrated in [10], the P/E ratio is revealed as a special case of PPP when both g = 0 and r = 0. This
confirms that PPP is not a rejection of the P/E ratio, but its dynamic generalization, extending it into a
time- and risk-aware framework.
3.2. The Prudent Assumption of Linearly Declining Growth
A key refinement in the PPP-SIRRIPA methodology is the assumption that earnings growth declines linearly
from the initial rate g to the discount rate r over the PPP horizon. This assumption is both realistic and
prudent, and it reflects the typical trajectory of a maturing business.
Rationale for this assumption:
• Empirical realism: Most companies do not sustain high
growth indefinitely. As businesses mature,
competitive pressures, market saturation, and diminishing marginal returns reduce growth rates.
• Theoretical consistency: As shown in [3] and [4], the
linear decline from g to r ensures that the exit
valuation at the end of PPP remains grounded, reflecting the market’s tendency to value mature firms at a
P/E consistent with their risk-adjusted expected return.
• Valuation stability: By modeling earnings growth as
declining rather than constant, we avoid
overestimating terminal earnings and reduce sensitivity to extreme assumptions—common flaws in DCF and
perpetual growth models.
Under this assumption, the average growth rate ḡ over the PPP period is calculated as:
This average growth rate is used in projecting future EPS and determining the Exit Price, as detailed below.
It effectively replicates the result of earnings growing at a rate that declines linearly from g to r over
the PPP horizon.
3.3. Deriving Return Metrics from PPP
Once the PPP is known, two return metrics can be derived:
a. SIRR — Stock Internal Rate of Return (Without Exit Price)
This metric expresses the average annualized return implied by cumulative discounted earnings
alone—excluding price appreciation. It is analogous to the yield of a zero-coupon bond, where returns stem
solely from internal cash flow accumulation.
b. SIRRIPA — Stock Internal Rate of Return Including Price Appreciation
SIRRIPA builds upon SIRR by incorporating both:
• The stream of discounted EPS, and
• The Exit Price, defined at the end of the PPP horizon.
Where:
This Exit P/E formulation has two critical properties:
1. Mathematical Consistency: When g = r, the PPP formula simplifies—via L’Hospital’s Rule—to yield an Exit
P/E equal to PPP ⋅ (1 + r). This ensures that the valuation framework remains continuous and stable as
growth expectations converge toward the discount rate—an essential property for long-term investment
analysis.
2. Financial Realism: As a company matures, its earnings growth rate typically declines toward the market’s
required return. At that point, the appropriate P/E multiple contracts to a level consistent with the firm’s
normalized return on capital and risk profile. The fact that the Exit P/E ratio naturally contracts to the
smaller figure of PPP when "g = r" is not merely a mathematical artifact—it reflects a rational,
market-aligned valuation outcome. As shown in [4], this behavior mirrors how mature companies are priced in
practice: investors assign lower multiples as growth decelerates and risk-adjusted returns stabilize.
By tying the Exit Price to a time-sensitive, performance-based multiple rather than a speculative terminal
value, SIRRIPA reinforces the integrity of the return estimate and avoids overstatement common in
traditional models.
3.4. Relationship Between PPP, SIRR, and SIRRIPA
3.5. Replacing Arbitrary Inputs with Structured Assumptions
SIRRIPA avoids the weaknesses of conventional DCF models by:
• Using a discount rate derived from CAPM, not assumed
arbitrarily,
• Establishing a natural horizon (PPP) instead of a fixed
terminal year,
• Deriving the Exit P/E from intrinsic characteristics, not
market multiples,
• Modeling growth as declining rather than perpetually
constant.
This structure removes much of the subjectivity found in traditional models and allows for valuation and
return measurement that is both theoretically rigorous and empirically grounded.
3.6. A New Standard for Return-Based Equity Valuation
SIRRIPA is not just a model—it is a reformulation of equity valuation logic. As demonstrated in [3] and [4],
it provides:
• A return metric compatible with bond YTM,
• A time-sensitive method applicable to high-growth and
loss-making firms [6],
• A foundation for unified asset allocation and
risk-adjusted portfolio design.
By generalizing the P/E ratio, embedding declining growth, and aligning with fixed-income logic, SIRRIPA
sets the stage for a coherent, modern approach to investment analysis—one capable of handling the realities
of today’s capital markets.
4. The Risk-Free Rate as a Common Benchmark for Bonds and Stocks
A defining innovation of the SIRRIPA framework is its alignment of equity valuation with fixed-income logic
through the shared use of the risk-free rate—typically proxied by the yield on long-term government bonds
such as the 10-year U.S. Treasury. In fixed-income markets, this rate forms the foundation for determining
the present value of future cash flows and for calculating risk premiums through yield spreads. In equity
valuation, however, traditional metrics such as the P/E ratio or PEG ratio generally operate without an
explicit benchmark, rendering risk and time largely implicit or absent altogether.
SIRRIPA resolves this inconsistency by anchoring stock valuation to the same foundational reference point as
bond valuation. By doing so, it enables both coherent risk pricing and cross-asset comparability,
establishing the risk-free rate as a universal benchmark for forward-looking return analysis.
4.1. From Bonds to Stocks: Anchoring Equity Valuation to the Risk-Free Rate
In fixed-income valuation, the Yield to Maturity (YTM) reflects the total expected return from a bond,
incorporating both periodic coupons and the final redemption value. It is calculated as the internal rate of
return that equates the bond’s current price with the present value of its future cash flows, all discounted
at a rate derived from—or at least benchmarked against—the risk-free rate:
In equity valuation using SIRRIPA, a similar structure emerges. The stock’s earnings stream (analogous to
coupons) and terminal Exit Price (analogous to face value) are discounted at a rate derived from the Capital
Asset Pricing Model (CAPM):
Here, the discount rate r represents the minimum required return for an investor holding a given stock, and
it is explicitly anchored to the same risk-free rate rf used in fixed-income pricing. This shared foundation
enables direct comparison of returns across asset classes using structurally analogous logic.
4.2. SIRRIPA and the Risk-Free Rate: A Yield-Based Paradigm for Equities
The SIRRIPA formula calculates the internal rate of return from both earnings and terminal value, discounted
using r, which incorporates the risk-free rate rf :
This formulation makes the risk-free rate rf an integral part of the valuation framework:
• It defines the discount rate r through CAPM,
• It shapes the Exit P/E multiple, via Exit P/E = PPP ⋅ (1 +
r),
• It enables the extraction of the equity risk premium as:
Stock Risk Premium (SRP) = SIRRIPA − rf
This last point is particularly significant. Just as the credit spread in bonds quantifies the market’s
pricing of risk over the risk-free baseline, the SRP measures the forward-looking compensation equity
investors require—not based on historical returns, but derived structurally from valuation inputs and cash
flow expectations.
4.3. Why This Alignment Is Transformative
Aligning equity valuation with bond methodology through a shared benchmark yields several powerful
advantages:
4.3.1. Unified Return Language Across Asset Classes
SIRRIPA makes it possible to compare a stock with a SIRRIPA of 10.2% and a bond with a YTM of 7.5%, both
measured against the same risk-free rate rf . This supports rational asset allocation, capital budgeting,
and performance benchmarking on a consistent basis.
4.3.2. Transparent and Dynamic Risk Pricing
Traditional valuation methods obscure risk by omitting explicit benchmarks. SIRRIPA formalizes the discount
rate using observable market inputs (risk-free rate and equity risk premium), which update dynamically with
economic conditions and investor sentiment.
4.3.3. Elimination of Arbitrary Discounting
In many DCF implementations, the discount rate is chosen arbitrarily—often defaulting to a static “rule of
thumb” (e.g., 10%). SIRRIPA replaces this with a theoretically grounded, CAPM-derived rate tied directly to
the prevailing interest rate environment.
4.3.4. Cross-Asset Optimization and Risk Budgeting
Institutional investors often struggle to balance equity and fixed-income allocations due to incompatible
return metrics. SIRRIPA enables apples-to-apples comparison, enhancing portfolio construction, risk parity
models, and stress-testing scenarios.
4.4. Empirical and Theoretical Reinforcement
This alignment of discounting logic and benchmark consistency has been validated in several of our prior
works:
• In [12], we demonstrate how using CAPM-derived discount
rates improves the interpretability and
comparability of DCF-based valuations under the SIRRIPA framework.
• In [3], SIRRIPA is shown to provide a bond-like return
metric for equities, allowing for real-time
comparison between growth stocks and yield-oriented instruments.
• In [17], we show how replacing the fixed assumptions of
the Gordon-Shapiro Model with time-sensitive,
risk-adjusted logic centered around the risk-free rate significantly improves valuation precision.
Collectively, these studies reinforce that anchoring SIRRIPA to the risk-free rate is not merely a
structural choice—it is a conceptual advancement that brings equity valuation into alignment with the
broader logic of capital markets.
4.5. A Common Valuation Standard for a Unified Capital Market
As capital markets become more integrated and asset allocators demand more consistent, transparent
frameworks, the use of the risk-free rate as a common anchor across asset classes becomes a baseline
requirement, not an analytical luxury.
The SIRRIPA framework meets this requirement by:
• Bridging fixed-income and equity valuation through
shared assumptions,
• Offering a risk-aware, time-dependent return
metric, and
• Supporting macro-consistent policy, regulatory, and
portfolio-level modeling.
In doing so, SIRRIPA does not simply reform equity valuation; it harmonizes it with the broader structure of
return-based decision-making across the financial system.
5. Comparing the Components of Return: Stocks vs. Bonds
A critical breakthrough enabled by the SIRRIPA framework is the recognition that the return structures of
stocks and bonds—while superficially different—are economically and mathematically comparable when viewed
through the proper conceptual lens. This section explains two essential equivalences that form the
foundation of this comparability, supported by real-world examples and rigorous financial theory.
5.1. Why Earnings per Share (EPS) Are Analogous to Bond Coupons
In bond valuation, coupon payments represent fixed, periodic cash flows contractually promised to
bondholders. These coupons form the backbone of a bond’s Yield to Maturity (YTM)—a return measure that
incorporates all future cash flows discounted to the present.
In equity valuation, the equivalent flow is not the dividend, but the Earnings Per Share (EPS). While
dividends represent the portion of earnings distributed, EPS captures the full economic value generated on
behalf of shareholders, including amounts retained by the company for reinvestment and future growth.
This leads to a fundamental equivalence:
EPS functions as the equity analog of bond coupons, because both represent recurring, value-generating flows
that belong to the investor—whether paid out or retained.
Supporting Rationale:
• Economic Equivalence: Rational investors are indifferent between receiving earnings via dividends
or
through retained reinvestment, provided that reinvested earnings yield adequate returns (per the
Modigliani–Miller theorem).
• Discounted Cash Flow Logic: In SIRRIPA, projected EPS are discounted over the Potential Payback
Period
(PPP), just as bond coupons are discounted over a bond’s life to compute YTM.
• Growth and Reinvestment: EPS inherently includes future value creation via compounding, similar to
bonds
with reinvested coupons.
This conceptual alignment is illustrated in [15], "NVIDIA Leads in Forward Returns", where stocks
with
modest dividend policies—but strong EPS growth—generate high SIRRIPA values. The analogy holds: reinvested
EPS in stocks acts like reinvested interest in bonds. The theoretical foundation for this treatment is
elaborated in [9], "Mathematics of Stock Valuation", and is consistent with frameworks found in [19]
Damodaran, [20] Penman, and [21] Koller et al.
5.2. Why Exit Price Is Analogous to a Bond’s Face Value or Redemption Price
In fixed-income investing, the face value (or redemption price) is the terminal payment a bondholder
receives at maturity. In calculating YTM, this lump sum is discounted along with the coupons to compute a
bond’s total return.
In equity valuation under the SIRRIPA framework, a parallel concept exists: the Exit Price. It reflects the
market value of the stock at the end of the PPP period and is calculated as:
This approach ensures that the Exit Price:
• Avoids speculation, by anchoring the terminal multiple to a function of time and risk.
• Incorporates growth, via the projected EPS at the end of PPP.
• Plays the same role as bond principal, by representing a final, discounted value that adds to the
total
return.
This analogy is applied in [14], "Resolving the Valuation Mystery of Palantir Technologies", where an
extreme forward P/E is rationalized through long-term earnings growth and a realistic Exit P/E. Despite a
current P/E above 500, the SIRRIPA calculation shows how long-term earnings and prudent exit valuation
produce a justifiable return—just as a zero-coupon bond trading at a steep discount can deliver competitive
YTM.
Similarly, [16], "The Insolent, Persistent Bull Market on Wall Street", demonstrates how upward momentum in
stock prices can be explained by retained earnings compounding over time, not short-term multiples—analogous
to premium bonds appreciating toward face value at maturity.
5.3. Summary Table: Structural Comparison Between Bonds and Stocks under SIRRIPA
5.4. Implication: Structural Equivalence Unlocks Rational Comparability
The above equivalences are not just theoretical—they are transformative. SIRRIPA re-engineers equity
valuation into a format that mirrors fixed-income logic, making it possible to:
• Compare stocks to bonds on a common risk-adjusted, time-sensitive basis.
• Value retained earnings and price appreciation without speculative projections.
• Incorporate market-based benchmarks such as the risk-free rate and CAPM-based discounting.
• Rationalize "irrational" market valuations by recasting them as time-based earnings realizations.
This structural equivalence also aligns with traditional and modern valuation thought. As demonstrated in
[22] Graham and Dodd’s Security Analysis and extended in [23] Value Investing: From Graham to Buffett and
Beyond, sound valuation always rests on linking price to long-term economic fundamentals—precisely what
SIRRIPA does by synthesizing periodic earnings and final price into one yield-like metric.
In doing so, SIRRIPA doesn’t just measure return—it unifies equity and bond valuation into a coherent,
comparable, and risk-sensitive system.
6. Implications for Investment, Policy, and Analysis
The emergence of SIRRIPA as a yield-based valuation metric for equities—structurally and mathematically
analogous to Yield to Maturity (YTM) in bonds—represents more than a methodological advance. It marks a
paradigm shift with wide-ranging consequences for portfolio construction, valuation theory, regulatory
modeling, and cross-asset capital allocation.
By establishing a time-sensitive, risk-adjusted, and internally consistent return framework rooted in the
Potential Payback Period (PPP), SIRRIPA offers a clear and unified lens through which modern equity
investments can be evaluated. This section explores the implications of this shift across three interrelated
domains: investors, analysts and academics, and public policy.
6.1. For Investors and Asset Managers: A Bond-Like Lens for Equity Portfolios
In institutional and retail investment strategy, the ability to compare expected returns across asset
classes is central to portfolio optimization. Bonds are evaluated using forward-looking yield metrics (e.g.,
YTM, effective duration), while equities are typically assessed using static or partial indicators (e.g.,
P/E ratios, dividend yield, growth forecasts).
SIRRIPA addresses this asymmetry by:
• Delivering a comprehensive annualized return metric for equities,
• Incorporating earnings trajectory, capital appreciation, and risk discounting,
• Enabling direct comparison with bond yields, mortgage-backed security IRRs, and even real estate cap
rates.
This equips asset managers to:
• Construct more coherent multi-asset portfolios,
• Match liabilities and forecast cash flows more precisely,
• Allocate capital based on time-adjusted risk premiums.
As illustrated in [3] and [4], applying SIRRIPA to stocks enables apples-to-apples comparison with
fixed-income products, helping to identify mispriced securities or strategic tilts based on the evolving
macroeconomic landscape (e.g., interest rate normalization, inflation cycles, or yield curve shifts).
6.2. For Analysts and Academics: A Return Metric That Restores Internal Consistency
In financial theory, valuation models are often based on discounted cash flows, yet the practice of equity
analysis is frequently dominated by ratios that fragment value (P/E, PEG, EV/EBITDA). This creates a
disconnect between theoretical rigor and applied metrics.
SIRRIPA resolves this inconsistency by:
• Synthesizing time, growth, and risk into one metric,
• Retaining the logic of present value modeling while avoiding speculative assumptions,
• Extending foundational valuation frameworks like the Gordon Growth Model (GGM) with finite-horizon realism
[17, 18].
From a pedagogical standpoint, SIRRIPA offers a powerful teaching tool:
• It bridges the gap between bond math and equity modeling,
• It reorients valuation around recovery time and yield, not just valuation multiples,
• It introduces a stock-specific internal rate of return, analogous to IRR in project finance and private
equity.
For empirical researchers, SIRRIPA offers a more robust measure for backtesting investment strategies,
modeling cross-sectional returns, or building factor-based models that integrate forward-looking valuation
with time sensitivity.
6.3. For Policymakers and Regulators: A Step Toward Unified Financial Standards
The financial system depends on consistent frameworks for evaluating risk and return. Regulators require
asset managers, insurers, and pension funds to model solvency and funding status across economic scenarios.
Yet, they still face fundamental inconsistencies:
• Bonds and stocks are modeled using incompatible valuation frameworks,
• Discount rate assumptions vary widely across sectors and institutions,
• Risk premiums are often estimated ex post, rather than derived structurally.
SIRRIPA addresses these challenges by:
• Offering a standardized, forward-looking return measure for equities that is anchored to the risk-free
rate,
• Providing a tool for stress-testing portfolios under interest rate or earnings growth scenarios,
• Supporting cross-asset risk calibration for policy models (e.g., capital adequacy, ALM models, solvency
frameworks).
For sovereign wealth funds, pension boards, and financial stability councils, SIRRIPA can serve as a
framework for risk-adjusted performance benchmarking, helping institutions assess whether expected returns
are aligned with funding requirements, risk constraints, and macroeconomic conditions.
6.4. Strategic and Practical Integration
Adopting SIRRIPA need not require discarding all legacy valuation methods. Rather, it can be integrated into
existing analysis as a synthesis metric:
• Use alongside DCF models to validate assumptions about capital recovery,
• Compare with P/E or PEG to detect when traditional ratios fail to account for growth timing or risk,
• Overlay with factor models or equity screens to identify misaligned valuation-risk profiles.
As shown across applications in [13], [14], [15], and [16], SIRRIPA is especially valuable for analyzing:
• High-growth or speculative stocks with extreme P/E ratios,
• Loss-making firms that are difficult to evaluate using static ratios [6],
• Interest-sensitive equities in a changing rate environment.
In this way, SIRRIPA becomes not just a new metric, but a core pillar of a valuation system—unifying the
precision of bond analysis with the growth dynamics of equity investment.
7. Conclusion: From Static Multiples to Dynamic Metrics
The dominant tools of traditional equity valuation—such as the P/E ratio, PEG ratio, Dividend Yield, and
even the Gordon-Shapiro Model—have served generations of investors and analysts. They are accessible,
intuitive, and deeply embedded in financial practice. Yet they are also products of a simpler analytical
era—one less attuned to the complexities of reinvestment, variable growth trajectories, cross-asset
allocation, and risk-adjusted return modeling.
At their core, these tools share fundamental structural limitations:
• They are static or one-dimensional, failing to capture the evolution of earnings over time.
• They are incomplete, often separating income from capital gains or focusing solely on distributions.
• They are incompatible with fixed-income valuation frameworks, preventing unified analysis across bonds and
equities.
The SIRRIPA framework—grounded in the Potential Payback Period (PPP)—addresses these deficiencies by
integrating the four essential dimensions of valuation: earnings, growth, risk, and time. It synthesizes
them into a single, yield-based return metric that allows equities to be evaluated in the same logic and
language long reserved for bonds:
• Just as Yield to Maturity (YTM) reflects both periodic coupons and terminal repayment,
• SIRRIPA integrates cumulative discounted earnings and a rational, performance-based Exit Price.
This alignment is more than a mathematical innovation—it represents a conceptual convergence. It places
equity valuation on equal footing with fixed-income analysis, providing a time-aware, risk-adjusted
framework for return forecasting, asset comparison, and capital allocation.
By treating Earnings Per Share (EPS) as the equity analogue of bond coupons and the Exit Price as analogous
to a bond’s face value, SIRRIPA offers a practical, internally consistent answer to the most fundamental
investment questions:
How much will I earn? Over what time? At what risk? Compared to what?
Because the framework is built on first principles—mathematically sound and adaptable to modern financial
modeling—it has the potential to integrate seamlessly into academic theory, practitioner toolkits,
regulatory guidelines, and fintech platforms.
In a financial world increasingly focused on comparability, transparency, and precision, SIRRIPA is not
merely an enhancement of legacy metrics. It redefines how value is measured—moving from static multiples to
dynamic, time-based return metrics—and lays the groundwork for a unified valuation methodology across the
full spectrum of investable assets.
That said, it is important to recognize the limitations and evolving nature of this approach. As a return
metric designed to evaluate a stock’s attractiveness on the same basis as a bond—anchored to the risk-free
rate as a universal benchmark—SIRRIPA may understandably challenge conventional valuation norms. While not
without its limitations, and subject to reasonable debate concerning its assumptions and computational
structure, the framework presented here aims to demonstrate its coherence and relevance as a forward-looking
tool for valuation.
The PPP and its derivative metrics are relatively new, and there is a pressing need for continued
research—both conceptual and empirical—to refine their theoretical foundations, test their predictive
validity, and assess their applicability across a wide range of industries, market cycles, and geographies.
Moreover, like all financial models, the reliability of PPP-based valuation is constrained by the quality of
its inputs—most notably projected earnings growth rates, discount rates, and risk measures such as beta.
Even the most rigorous framework can yield misleading results if built on flawed or overly optimistic
assumptions. This underscores the critical importance of sensitivity analysis, which must accompany any
serious valuation exercise using PPP or its derivatives to assess the robustness of conclusions under
varying input scenarios.
Ultimately, no model can capture every relevant variable or anticipate all market dynamics. The objective is
not to predict the future with certainty, but to reflect economic reality as faithfully as possible—while
offering a logically consistent, transparent, and decision-relevant approach to valuation. In this respect,
SIRRIPA represents both a theoretical advance and a practical tool—one that encourages more disciplined
thinking about return, risk, and time in modern equity markets.
References I- Articles Introducing or Applying the PPP and SIRRIPA Framework [1] Sam, R. (1984). Le P.E.R., un instrument mal adapté à la gestion mondiale des portefeuilles. Comment remédier à ses lacunes. Analyse Financière. https://www.stockinternalrateofreturn.com/Analyse-Financie%CC%80re_1.pdf [2] Sam, R. (2023). Stock Evaluation: Discovering the Potential Payback Period (PPP) as a Dynamic P/E Ratio. Website. https://www.stockinternalrateofreturn.com/index.html [3] Sam, R. (2025). SIRRIPA: The Stock-Tailored Yield to Maturity (YTM) and the Emergence of a Cross-Asset Valuation Metric. https://doi.org/10.20944/preprints202504.1934.v1 [4] Sam, R. (2025). Why SIRRIPA is Set to Replace the P/E Ratio in Modern Equity Valuation. https://www.preprints.org/manuscript/202504.1213/v1 [5] Sam, R. (2025). Mathematics of Stock Valuation: Why the Potential Payback Period (PPP) Outperforms the P/E and PEG Ratios. 10.5281/zenodo.15668147 [6] Sam, R. (2025). Breaking the Valuation Deadlock: Replacing the P/E Ratio with the Potential Payback Period (PPP) for Loss-Making Companies – A Case Study on Intel (2025). http://dx.doi.org/10.2139/ssrn.5247858 [7] Sam, R. (2025). Proving that the P/E Ratio is Just a Limiting Case of the Potential Payback Period (PPP) When Earnings Growth and Interest Rate are Ignored. https://ssrn.com/abstract=5254723 [8] Sam, R. (2025). Beyond Valuation: The Four PPP-Derived Return Metrics and Their Role in Modern Equity Analysis. 0.5281/zenodo.16155541 [9] Sam, R. (2025). Mathematics of Stock Valuation: How the Potential Payback Period (PPP) Subsumes the P/E and PEG Ratios. http://dx.doi.org/10.2139/ssrn.5314340 [10] Sam, R. (2025). A Quantitative Revelation in Equity Valuation: The P/E Ratio as a Degenerate Case of the Potential Payback Period (PPP). DOI: https://doi.org/10.20944/preprints202505.2166.v1 [11] Sam, R. (2025). How to Adjust the P/E Ratio for Earnings Growth in Equity Valuation: PEG or PPP? DOI: https://doi.org/10.20944/preprints202505.0212.v1 II- Articles Addressing Specific Valuation Models (Including Gordon-Shapiro) or Case Studies [12] Sam, R. (2025). Reassessing the Discounted Cash Flow Model (DCFM): How the Potential Payback Period (PPP) Improves Applicability and Accuracy with a Time-Based Approach. http://dx.doi.org/10.2139/ssrn.5279126 [13] Sam, R. (2025). Is the S&P 500 Overvalued? All Metrics Say Yes, Except SIRRIPA. http://dx.doi.org/10.2139/ssrn.5320663 [14] Sam, R. (2025). Resolving the Valuation Mystery of Palantir Technologies: How PPP and SIRRIPA Rationalize a Market Darling with a P/E Over 500. http://dx.doi.org/10.2139/ssrn.5338179 [15] Sam, R. (2025). NVIDIA Leads in Forward Returns: A PPP-Based Stock Valuation Analysis of Four Leading Technology Firms. http://dx.doi.org/10.2139/ssrn.5337514 [16] Sam, R. (2025). The Insolent, Persistent Bull Market on Wall Street: A Rebuttal to Traditional Metrics—P/E Ratio, PEG Ratio, and Earnings Yield—and a Validation of SIRRIPA. http://dx.doi.org/10.2139/ssrn.5347721 [17] Sam, R. (2025). Revisiting the Gordon-Shapiro Model: How the Potential Payback Period (PPP) Refines and Operationalizes a Foundational Framework in Stock Valuation. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5257245 [18] Sam, R. (2025). Making the P/E Ratio a Truly Dynamic Valuation Metric: Gordon-Shapiro vs. Potential Payback Period (PPP). https://zenodo.org/records/15832809 III- Foundational and Independent Books on Valuation Theory [19] Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd ed.). Wiley. [20] Penman, S. H. (2013). Financial Statement Analysis and Security Valuation (5th ed.). McGraw-Hill Education. [21] Koller, T., Goedhart, M., & Wessels, D. (2020). Valuation: Measuring and Managing the Value of Companies (7th ed.). Wiley. [22] Graham, B., & Dodd, D. L. (2009). Security Analysis: Sixth Edition, Foreword by Warren Buffett. McGraw-Hill Education. [23] Greenwald, B., Kahn, J., Sonkin, P. D., & van Biema, M. (2004). Value Investing: From Graham to Buffett and Beyond. Wiley.
THE FIRST TO SEE THE WALL STREET CRASH COMING: RAINSY SAM AND THE PREDICTIVE POWER OF THE POTENTIAL PAYBACK PERIOD (PPP) Rainsy Sam — a Cambodian-born economist, equity research analyst, investment manager, and former Finance Minister — was the first to publicly predict the current Wall Street crash, which has been triggered by President Donald Trump’s chaotic economic policies. His March 12 article, “Anatomy of a Looming Bear Market: How to Assess the Impact of Donald Trump's Chaotic Economic Measures on Wall Street,” was first posted on LinkedIn, later published in the Revue Française d’Économie et de Gestion https://www.revuefreg.fr/index.php/home/article/view/2057/1636, and quickly gained traction across professional and financial networks. What distinguishes this analysis is its use of the Potential Payback Period (PPP) — a groundbreaking valuation tool that goes far beyond conventional metrics such as the P/E and PEG ratios. By integrating earnings growth, interest rates, and risk, the PPP offers a more rigorous, dynamic, and forward-looking understanding of stock market valuation. Importantly, Rainsy Sam’s prediction was not based on vague notions of “market sentiment” or subjective, non-quantified interpretations common in financial literature. Instead, it was built on explicit, quantified hypotheses about future earnings growth, supported by sensitivity analysis that demonstrated how variations in key inputs would affect the PPP, the SIRRIPA (Stock Internal Rate of Return Including Price Appreciation), and ultimately, the SRP (Stock Risk Premium) representing the difference between the SIRRIPA and a risk-free rate (such as the 10-year U.S. Treasury yield). Through this analytical lens, Rainsy Sam accurately identified a shift in the S&P 500 from undervaluation to overvaluation — anticipating a downturn well before traditional signals caught up. His model demonstrated how declining earnings expectations — fueled by the erratic and destabilizing nature of Trump’s economic measures — would lengthen the PPP, reduce the SIRRIPA, and produce a negative SRP, signaling the market’s slide into bear territory. As financial markets continue to plunge, Rainsy Sam’s analysis underscores the predictive power and practical relevance of the PPP methodology. It affirms its value as a critical instrument for investors, analysts, and policymakers seeking to navigate the complex realities of today’s global economy. (End)
LE PREMIER A AVOIR VU VENIR LE KRACH DE WALL STREET : RAINSY SAM ET LE POUVOIR PREDICTIF DU POTENTIAL PAYBACK PERIOD (PPP) Rainsy Sam — économiste d’origine cambodgienne, analyste financier, gestionnaire de fonds et ancien Ministre des Finances — a été le premier à prédire publiquement le krach actuel de Wall Street, déclenché par les politiques économiques chaotiques du président Donald Trump. Son article du 12 mars, intitulé « Anatomy of a Looming Bear Market: How to Assess the Impact of Donald Trump's Chaotic Economic Measures on Wall Street » (ou « Anatomie d’un krach boursier imminent: Comment évaluer l’impact des mesures économiques chaotiques de Donald Trump sur Wall Street »), a d’abord été publié sur LinkedIn, puis dans la Revue Française d’Économie et de Gestion https://www.revuefreg.fr/index.php/home/article/view/2057/1636, et a rapidement circulé dans les cercles professionnels et financiers. Ce qui distingue cette analyse, c’est l’utilisation du Potential Payback Period (PPP) — un outil d’évaluation révolutionnaire qui va bien au-delà des indicateurs traditionnels comme les ratios P/E et PEG. En intégrant la croissance des bénéfices, les taux d’intérêt et le risque, le PPP permet une compréhension plus rigoureuse, dynamique et prospective de la valorisation des marchés boursiers. Fait important : la prévision de Rainsy Sam ne repose pas sur des notions vagues de "sentiment de marché" ou sur des interprétations subjectives et non chiffrées, comme c’est souvent le cas dans la littérature financière. Elle s’appuie au contraire sur des hypothèses explicites et quantifiées relatives à la croissance future des bénéfices, appuyées par une analyse de sensibilité montrant comment les variations des principales variables influencent le PPP, le SIRRIPA (Stock Internal Rate of Return Including Price Appreciation), et en fin de compte le SRP (Stock Risk Premium), qui représente la différence entre le SIRRIPA et un taux sans risque (tel que le rendement des bons du Trésor américain à 10 ans). Grâce à cette approche analytique, Rainsy Sam a identifié avec précision un basculement du S&P 500 d’une situation de sous-évaluation à une situation de surévaluation — anticipant un retournement bien avant que les signaux traditionnels ne le détectent. Son modèle a démontré comment une baisse des prévisions de bénéfices — alimentée par la nature erratique et déstabilisatrice des mesures économiques de Trump — entraînerait un allongement du PPP, une baisse du SIRRIPA et un SRP négatif, signalant l’entrée du marché en territoire baissier. Alors que les marchés financiers continuent de s’effondrer, l’analyse de Rainsy Sam met en lumière le pouvoir prédictif et la pertinence pratique de la méthodologie PPP. Elle confirme la valeur de cet outil comme instrument essentiel pour les investisseurs, les analystes et les décideurs souhaitant naviguer dans les réalités complexes de l’économie mondiale contemporaine. (Fin)
No international financial journal has accepted to publish any of my articles on the Potential Payback Period (PPP) and its applications because I could not cite any book in my references that had previously discussed the concept. This is unsurprising, as I am the one who developed this new framework, and no one else has yet written a book explaining the PPP, along with its derivatives such as the Stock’s Internal Rate of Return and the Hidden Value Zone, or its various applications. This situation creates a vicious cycle that obstructs the dissemination of innovation—until my book, the first on the subject, is hopefully published in a few months. Until then, the lack of prior literature prevents academic validation, and the absence of validation, in turn, discourages publication. This paradox highlights the difficulties of introducing groundbreaking financial methodologies within the rigid framework of traditional academic publishing.
Abstract: Traditional valuation metrics such as the Price-to-Earnings (P/E) ratio, PEG ratio, and Earnings Yield are widely used in assessing stock and market valuations. However, these tools often lead to misleading conclusions by failing to incorporate earnings growth, discount rates, and risk. The Potential Payback Period (PPP) and its derived Internal Rate of Return (IRR) offer a superior framework by addressing these limitations. This article demonstrates how the PPP and IRR provide a more accurate valuation of the S&P 500 as of January 2025 and explain why a stock with a high P/E ratio can be a better investment than one with a low P/E ratio. The findings challenge conventional wisdom, highlighting the importance of a dynamic, growth-adjusted, and risk-inclusive approach to stock valuation. Keywords: Stock Valuation, Price-to-Earnings (P/E) Ratio, Potential Payback Period (PPP), Internal Rate of Return (IRR), PEG Ratio, Earnings Yield.
Introduction
Stock valuation is a critical aspect of investment decision-making. Traditional metrics like the P/E ratio,
PEG ratio, and Earnings Yield have been widely used for decades, but they fail to capture the full
complexity of stock pricing. By ignoring key factors such as earnings growth, risk, and the cost of capital,
these metrics often lead to erroneous conclusions. This article introduces an alternative framework based on
the Potential Payback Period (PPP) and the Internal Rate of Return (IRR), which offer a more comprehensive
and mathematically sound approach to valuation.
1. The Limitations of Traditional Metrics
Traditional valuation metrics have inherent weaknesses:
• P/E Ratio: Ignores earnings growth and the time value of money,
leading to
misleading comparisons across
companies and industries.
• PEG Ratio: Uses a simplistic linear adjustment that fails to
reflect the real
impact of earnings growth on
valuation.
• Earnings Yield: Provides an incomplete picture of valuation by
neglecting the
interplay between earnings
growth and risk.
These shortcomings are particularly problematic in dynamic market conditions, where earnings growth and
interest rates play a crucial role in determining stock prices. As a result, investors relying solely on
traditional metrics may miss valuable investment opportunities or misinterpret market signals.
2. The Concepts and Formulas Behind the Potential Payback Period (PPP) and the Internal Rate of
Return (IRR)
To address the limitations of traditional metrics, the PPP and IRR introduce a framework that accounts for
earnings growth and risk-adjusted discounting. This section explores the relevance and mathematical
foundation of these two concepts and how they provide a more holistic view of stock valuation.
2.1. The Potential Payback Period (PPP)
The PPP calculates the theoretical number of years required for the cumulative discounted future earnings of
a stock to equal its current price. The formula is as follows:
This formula dynamically adjusts the P/E ratio to reflect the effects of earnings growth and the time value
of money. When growth and interest rates are zero (g = r = 0), the PPP simplifies to the P/E ratio,
demonstrating that the latter is a static case of the more comprehensive PPP framework.
2.2. The Internal Rate of Return (IRR)
The IRR is derived from the PPP and represents the implied annualized return an investor would earn if they
held a stock for a duration equal to its PPP. The formula is:
Unlike traditional metrics, the IRR provides a dynamic, risk-adjusted view of expected returns, making it a
superior tool for evaluating investment opportunities.
3. The S&P 500 Is NOT Overvalued as of January 2025
Despite concerns about high valuations, the PPP and IRR suggest that the S&P 500 remains fairly valued when
earnings growth and risk are taken into account.
3.1. Traditional Metrics Suggest Overvaluation
• P/E Ratio: The S&P 500's P/E of 30 is significantly higher than
its historical average of 16-18, raising
concerns of overvaluation.
• PEG Ratio: With an EPS growth rate of 18%, the PEG ratio is 1.67,
exceeding the conventional threshold of 1.
• Earnings Yield: At 3.33%, it is lower than the risk-free rate of
4.62%, further suggesting overvaluation.
3.2. PPP and IRR Provide a More Accurate Picture
Using PPP and IRR calculations:
• At a 4.62% Discount Rate (Risk-Free Rate):
◦ PPP = 13.10 years
◦ IRR = 5.43%
◦ Since IRR > Risk-Free Rate, the S&P 500 is not overvalued.
• At a 7.62% Discount Rate (Risk-Free Rate + Market Risk Premium):
◦ PPP = 14.76 years
◦ IRR = 4.81%
◦ Still higher than the risk-free rate, justifying current market
levels.
Thus, the S&P 500 remains an attractive investment under both risk-free and risk-adjusted perspectives.
4. High P/E Stocks Can Outperform Low P/E Stocks
4.1. P/E Ratios Can Mislead
Investors often assume that a lower P/E ratio indicates a better investment opportunity. However, this
perspective ignores key factors such as earnings growth and discounting. A stock with a high P/E ratio can
still offer superior returns if its growth rate justifies its valuation.
A real-world comparison between Applied Materials (AMAT) and Broadcom (AVCO), based on data as of January
24, 2025, illustrates this principle.
• Applied Materials (AMAT) has a P/E ratio of 22, which appears
more attractive than Broadcom’s P/E ratio of
188 when considering only this metric. However, stock performance tells a different story.
• Over the last six months:
◦ Applied Materials’ stock price declined by 15%, despite its lower
P/E ratio.
◦ Broadcom’s stock price increased by 50%, despite its high P/E
ratio, highlighting the limitations of static valuation metrics.
4.2. PPP and IRR Tell the Full Story
When earnings growth and discounting are factored in, the comparison between Applied Materials and Broadcom
provides a different perspective:
• Applied Materials (AMAT):
◦ Earnings Growth Rate: 8%
◦ Discount Rate: 4.62%
◦ PPP: 16.89 years
◦ IRR: 4.19%
• Broadcom (AVCO):
◦ Earnings Growth Rate: 32%
◦ Discount Rate: 4.62%
◦ PPP: 16.85 years
◦ IRR: 4.20%
Despite its high P/E ratio, Broadcom’s superior earnings growth results in a PPP and IRR nearly identical to
those of Applied Materials. This demonstrates that Broadcom’s valuation is justified by its strong growth
potential, making it an equally attractive investment.
This analysis reinforces that relying solely on the P/E ratio can be misleading. The PPP and IRR offer a
more comprehensive perspective, incorporating earnings growth and risk-adjusted discounting to provide a
clearer picture of a stock’s true value.
Conclusion
The PPP and IRR offer a more accurate, growth-adjusted valuation framework than traditional metrics.
• For the S&P 500: Despite a historically high P/E ratio, its IRR
remains above the risk-free rate, proving it
is not overvalued.
• For Individual Stocks: Growth-adjusted metrics explain why
high-P/E stocks like Broadcom can outperform low-P/E stocks in the same sector like Applied Materials.
Investors should adopt PPP and IRR for a more accurate understanding of stock valuations. For more
information, visit www.stockinternalrateofreturn.com.
Rainsy Sam
Reference List
1. Basu, S. (1977). Investment performance of common stocks in relation to their price-earnings ratios:
A
test of the efficient market hypothesis. The Journal of Finance, 32(3), 663–682. The article examines
the
behavior of P/E ratios in stock valuation and market performance, providing foundational insight into
their
limitations. Link
2. Bodie, Z., Kane, A., & Marcus, A. J. (2013). Investments (10th ed.). McGraw-Hill. The book offers
comprehensive coverage of investment theory, useful for contrasting traditional valuation methods with
the
PPP-derived IRR.
3. Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance. McGraw-Hill
Education.
The book discusses valuation fundamentals and their practical application in real-world finance.
4. Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any
Asset.
Wiley Finance. The book provides an in-depth overview of valuation models, including the P/E ratio and
growth-related metrics, and highlights why traditional methods may fall short in capturing long-term
earning
power.
5. Fama, E. F., & French, K. R. (1993). Common risk factors in the returns on stocks and bonds. Journal
of
Financial Economics, 33(1), 3-56. The book explores risk factors in stock and bond returns, relevant for
understanding risk-adjusted metrics in investment evaluation.
6. Gordon, M. J., & Shapiro, E. (1956). Capital equipment analysis: The required rate of profit.
Management
Science, 3(1), 102–110. The article is a seminal work on growth models, key to understanding the
discounting
mechanism in PPP and IRR. Link
7. Gordon, M. J. (1962). The Investment, Financing, and Valuation of the Corporation. Irwin Series in
Economics. The book discusses growth models and their impact on corporate valuation.
8. Graham, B., & Dodd, D. (1934). Security Analysis. McGraw-Hill. The book is a classic text on value
investing, emphasizing intrinsic value, a concept central to the PPP framework.
9. Lynch, P., & Rothchild, J. (2000). One Up on Wall Street: How to Use What You Already Know to Make
Money
in the Market. Simon & Schuster. The book discusses practical valuation tools like the PEG ratio and
highlights their limitations in high-growth scenarios.
10. Malkiel, B. G. (2019). A Random Walk Down Wall Street: The Time-Tested Strategy for Successful
Investing. W. W. Norton & Company. The book highlights the importance of advanced valuation methods in
dynamic markets.
11. Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance, and the theory of
investment. The American Economic Review, 48(3), 261-297. The article represents a foundational work in
financial theory, discussing the impact of capital costs on corporate finance decisions, relevant to the
PPP's incorporation of discount rates.
12. Morningstar, Inc. (2024). Key Metrics for Stock Valuation: P/E, PEG, and Beyond. Morningstar
Research
Reports. The report explores modern adaptations of valuation metrics and their use in high-growth
sectors.
13. Piotroski, J. D. (2000). Value investing: The use of historical financial statement information to
separate winners from losers. Journal of Accounting Research, 38, 1-41. The article investigates
alternative
frameworks for stock value assessment.
14. Sam, R. (1984). Le P.E.R., un instrument mal adapté à la gestion mondiale des portefeuilles. Comment
remédier à ses lacunes. Analyse Financière, 2ème trimestre. The article critiques the P/E ratio's
effectiveness in global portfolio management and introduces the "Délai de Recouvrement (DR)" or "Payback
Period (PP)" concept. Link
15. Sam, R. (1985). Le Délai de Recouvrement (DR). Analyse Financière, 3ème trimestre. The article
refines
the DR concept, laying the groundwork for the Potential Payback Period (PPP). Link
16. Sam, R. (1988). Le DR confronté à la réalité des marchés financiers. Analyse Financière, 4ème
trimestre.
The article demonstrates early applications of the DR to portfolio management. Link
17. Sam, R. (2024). Stock Evaluation: Discovering the Potential Payback Period (PPP) as a Dynamic P/E
Ratio.
The website is a dedicated platform for financial analysis, focusing on the PPP's innovative application
in
deriving the IRR. Link
18. Sam, R. (2024). The Potential Payback Period (PPP): Revolutionizing Stock Valuation. [Manuscript in
Progress]. The book will explore the PPP methodology's theoretical foundation and practical
applications.
19. Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk.
The
Journal of Finance, 19(3), 425–442. The article introduces the Capital Asset Pricing Model (CAPM),
essential
for understanding risk adjustments in the PPP. Link
Instant calculations at https://stockinternalrateofreturn.com/instant_calculations.html
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
