FIN423 Class 14: The Molodowsky Effect, Value Traps & Forward P/E | Brac University

https://drive.google.com/drive/folder... Course materials for the playlist Welcome back to FIN423: Security Analysis and Portfolio Management at BRAC Business School! In this lecture, we shift our focus from Absolute Valuation (DCF and Dividend Discount Models) to Relative Valuation, also known as the Method of Comparables. We explore how the market prices a company relative to its peers using Price Multiples (like the P/E ratio) and Enterprise Value Multiples. Understanding a P/E ratio is easy, but applying it correctly is difficult. We break down the mechanics of the Price-to-Earnings ratio, Earnings Yield, and the crucial differences between Trailing P/E and Forward (Leading) P/E. More importantly, we discuss the behavioral and economic pitfalls of relative valuation. You will learn how to spot a "Value Trap," why non-recurring earnings must be stripped from your analysis, and how cyclical industries distort P/E ratios through the Molodowsky Effect. 📌 In This Video, We Cover: Relative Valuation Basics: The difference between Price Multiples (P/E, P/B, P/CF) and Enterprise Value Multiples (EV/EBITDA). Interpreting the P/E Ratio: What a P/E of 20 actually means and how to flip it into an Earnings Yield (E/P) to compare against risk-free treasury rates. The "Value Trap": Why a stock trading at a very low P/E multiple might not be cheap, but rather a dying business losing its competitive advantage. Trailing vs. Forward P/E: Why financial markets price stocks based on expected future earnings (Forward P/E) rather than historical data. Non-Recurring Items: Why one-off events (like a factory relocation for British American Tobacco or a sudden land sale) must be ignored to find core sustainable earnings. The Molodowsky Effect: Why cyclical companies (like automotive or construction firms) have misleadingly low P/E ratios at the peak of an economic cycle and high P/E ratios at the bottom. Corporate Case Study - Apple: Analyzing Apple's massive valuation growth over the last 15 years under Tim Cook. We discuss how market multiples expand when a company proves it can deliver stable, consistent earnings versus high-risk innovation.