infavorofonethatcomparesthestock’spricingto
the median for the sector.- Probabilisticstatements.Asaresultofthefocuson
normal distributions in most statistics classes, we
beginattributingitspropertiestoalldistributions.For
instance,itistruethattheprobabilityofvaluesina
normal distribution falling more thantwo standard
deviationsawayfromthemeanisverysmall.Inthe
caseoftheP/Eratio,thisrulewouldsuggestthatfew
companies should have P/E ratios that fall below
40.74 (which is the average of 48.12 minus two
standarderrors)orabove55.5(theaverageplustwo
standard errors). The reality is that there are
thousandsoffirmsthatfalloutsidethisrange.While
the maximumand minimumvalues are usually of
limited use, the percentile values (10th percentile,
25thpercentile,75thpercentile,90thpercentile,etc.)
canbeusefulinjudgingwhatisahighorlowvalue
for the multiple in the group.
Outliers and Averages
As notedearlier, multiplesareunconstrained on theupper
end,andfirmscantradeatmultiplesof 500 or2,000oreven
10,000.Thiscanoccurnotonlybecauseofhighstockprices
butalsobecauseearningsatfirmscansometimedroptoafew
centsorevenafractionofacent.Theseoutlierswillresultin
averagesthatarenotrepresentative ofthesample.Inmany
cases, data reporting services (such as Value Line and
Standard&Poor’s)thatcomputeandreportaveragevalues
formultipleseitherthrowouttheseoutlierswhencomputing
theaveragesorconstrainthemultiplestobelessthanorequal
to a fixed number. For instance, any firm that has a