EV1 Relative PE Valuation

Two stocks are valued at a fixed price-earnings ratio on released earnings. Earnings are released three times.

Objective

Value each stock from its earnings and trade against the price. Assessed on profit and loss, with closing positions valued at the final value.

What it shows

• Relative valuation: a stock is worth its earnings times a multiple.
• A price reacting to a release, and how long the reaction takes.
• Two stocks with different multiples, so one release can move them unequally.

Watch out for

• Trading on the release before working out what it implies.
• Applying one multiple to both stocks.
• Releases that carry different news for the two stocks.

Who takes part

• Trader — every student. Trades AAA and BBB, two stocks, with 100,000 in cash.

Class size

Ten to forty students in one role. A release moves many traders at once, so the book is tested when the class is larger.