Justified price multiple- Wiley guide users

[300hoursoverand]

I am a bit stumped here. What does this mean?
“Justified price multiple is the value that the multiple would take where the stock currently trades at its fair value.
If justified multiple is larger than the current muliple of stock, the stock is undervalued”
How is it undervalued if the multiple is higher? isnt it supposed to be overvalued since the price is higher?

 

[cpk123]

say you take the P/E multiple.
Current multiple = 4
Justified Multiple = 5
If your earnings were 10$ - your Price per current multiple is 40$, while it would be 50$ based on the Justified multiple. So you have an undervalued stock… (since your current multiple says 40$ below the actual 50$ indicated by justified multiple).

 

[300hoursoverand]

cpk123 wrote:
say you take the P/E multiple.
Current multiple = 4
Justified Multiple = 5
If your earnings were 10$ - your Price per current multiple is 40$, while it would be 50$ based on the Justified multiple. So you have an undervalued stock… (since your current multiple says 40$ below the actual 50$ indicated by justified multiple).

Does this intrepretation change in the opposite manner based on what measure the justified multiple uses? As in, based on the methods of comparables or the methods of fundemental forecasts?

 

[krokodilizm]

Let me rephrase your statement.
If the current multiple of stock is less than the justified multiple then the stock is undervalued.
Now it makes more sense, doesn’t it?
So yeah, compared to the current market data, if the fundamental/justified data indicate a higher figure then the stock should be worth more than it is, i.e. it is undervalued.

 

[300hoursoverand]

yes, that makes sense. Thanks a lot.