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Disney Provides The Proof: PE Expansion Is Well Under Way

Seeking Alpha readers often use price/earnings (PE) and price/cash flow (CFX) multiples to help them decide whether a stock is an attractive investment or not. By comparing the current multiple with historical multiples, one can see if the market has "already priced in growth prospects," or conversely, if the company shares might be in the bargain counter.

This process works all well and good assuming there are not secular, long term trends in the multiples investors are willing to pay for earnings or cash flow. Unfortunately, this is indeed the case. One of the reasons why investment performance was so poor throughout the final years of the previous decade was analysts were comparing then-current PEs with PEs that had prevailed in the late 1990s and early 2000s. Everyone knows about the tech "bubble" and Nasdaq; but even blue collar blue chips like General Electric (GE) sported PEs of 50x earnings… Read More …