Growth versus value..buying high pe justifiable? Great question. lets look at a real world example.For the high pe component I ll use the current darling google. Google trades at a market cap of 123 billion dollars and produces 2.7 billion of operating cash flow. The consesnus analyst survey for goodles forward growth rate is 30% a year for the next 5 years.at this rate the cash flow grows to 10.02 billion giving us an earnings yield on our original investment of 8% not too shabby. Except that if we focus on just buying good companies at great prices, at todays price for google we can buy all of:
American eagle outfitters..aeos
helen of troy...hele
barnes and noble..bks
h and r block...hrb
this portfolio of comapanies from the start generates over 13 billion over operating earnings.in 5 years of growing at just 10%..and all of them have a consensus estimate of that or better, in 5 years they produce over 20 billion of operating cash earnings...twice what the rapid growing goole is producing, an earnings yield of 19% on orginal investment. Looking further out if google continues to grow at 20% a year and our portfolio of finance, energy, media,insurance,education,retail,motorcycles,persoanl services,gaming and technology companies slows to 5% a year, the eranings crossover where google outearns the cheapies occurs in the 11th year. This assumes that none of the 10 billion or so of excess operating earnings was reinvested profitably over that period of time. a most unlikely suggestion in my opinion.it alos implies that no new competotor to goole such as CRUSTY slows google growth rate.