assessment ofthestockbeingundervalued.Theotheristo
consider it a potential clue that we may be missing key
elementsinthevaluation.Forinstance,earningsatinvestment
banks arenotoriouslyvolatile,and 2004 happenedto be a
lucrativeoneformostofthem.Itisentirelypossiblethatthe
marketisconsideringthecyclicalityintheseearningswhile
valuingGoldmanandwearebeingoverlyoptimisticinour
assessment of good years to come.
The H Model for Valuing Growth
TheHmodelisatwo-stagemodelforgrowth,butunlikethe
classictwo-stagemodel,thegrowthrateintheinitialgrowth
phaseisnotconstantbutdeclineslinearlyovertimetoreach
the stable growth rate in steady stage. This model was
presented in Fuller and Hsia (1984) and is based on the
assumptionthattheearningsgrowthratestartsatahighinitial
rate(ga)anddeclineslinearlyovertheextraordinarygrowth
period (which is assumed to last 2H periods) to a stable
growth rate (gn).
2 Italsoassumesthatthedividendpayoutandcostofequity
areconstantover timeand arenot affectedbytheshifting
growthrates.Figure5.2graphstheexpectedgrowthovertime
in the H model.
FIGURE 5.2Expected Growth in the H Model