Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics)

by Philip A. Fisher

Let us suppose that four years later the price-earnings ratios of stocks as a whole are unchanged so that generally sound stocks, but ones with no growth prospects, are still selling at ten times earnings. Let us also suppose that at this same time, four years later, one of our two stocks has much the same growth prospects for the time ahead as it had four years before so that the financial community's appraisal is that this stock should again double its earnings over the next four years. This means it would still be selling at twenty times the doubled earnings of the past four years, or, in other words, that it had also doubled in price in that period. In contrast, at this same time, four years after our example had started, the second stock had also doubled its earnings, just as had been expected, but at this point the financial community's appraisal is for flat earnings in an otherwise sound company over the next four years. This would mean that owners of this second stock were in for a market disappointment even though the four-year doubling of earnings had come through exactly as forecast. With an image of “no growth in earnings for the next four years.” they would now be seeing a price-earnings ratio of only ten in this second stock. Therefore, while the earnings had doubled, the price of the stock had remained the same.