One interesting valuation method that came up was designed by Jeremy Siegel from his book, Stocks the for Long Run.
As far as I know, there is no official name for the valuation method, and there is only one website that uses this method and has called it the O-Metrix score.
I’ll stick with the name. So let’s go through what it is, how it is used and my verdict on how useful I find it.
What is the O-Metrix Score?You know about the Piostroki F Score, Altman Z Score and the Beneish M Score. All created by Professors based upon their intense research.
The O-Metrix score too was developed by a professor. Jeremy Siegel is a professor of Wharton School of Business, and describes the O-Metrix method as well as other in his book, Stocks for the Long Run.
The O-Metrix is based upon a combination of three metrics.
We all want to buy stocks with high growth, a dividend and low price and the following equation is supposed to be able to identify such stocks.
A rule of thumb for stock valuation that is found on Wall Street is to calculate the sum of the growth rate of a stock’s earnings plus its dividend yield and divide by its P-E ratio. The higher the ratio the better, and the famed money manager Peter Lynch recommends investors go for stocks with a ratio of two or higher, avoiding stocks with a ratio of one or less.
O-Metrix = (Dividend Yield + Earnings Growth) / PE Ratio
and if you are dividend income investor, more emphasis is required for dividends, so the dividend variation is referred to as the Double Dividend O-Metrix Score.
DD O-Metrix = (2 x Dividend Yield + Earnings Growth) / PE Ratio
Going back to that quote a little higher up; “Peter Lynch recommends investors go for stocks with a ratio of two or higher, avoiding stocks with a ratio of one or less”, the above two equations can be multiplied by 5 to make the scale range from 0 to 10 instead of betwen 0-1, which makes it easier to identify and classify stocks.
The equations now become:
O-Metrix = 5 x [(Dividend Yield + Earnings Growth) / PE Ratio]
DD O-Metrix = 5 x [(2 x Dividend Yield + Earnings Growth) / PE Ratio]
EFSInvestment has provided his grading system which I’ll go by.