Opportunities and Expectations: The Present Value of Growth Opportunities in Valuation

• Stock prices commonly reflect the value of current earnings, or the steady state, and the option to make future investments that create value, the PVGO.
• We analyze how PVGO as a percentage of price, a proxy for investor expectations, serves as a measure of market timing and find it has modest usefulness, mostly at the extremes.
• Next, we consider the PVGO percentage for individual companies and observe that stocks with low percentages outperformed those with high percentages by 260 basis points per year.
• We describe a simple analysis that suggests the PVGO percentage may have provided a higher, and more consistent, return than the value factor over the past 25 years.

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