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Author: ohok One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 41  
Subject: Re: Why's the P/E so high? Date: 2/9/1998 7:21 AM
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hula - if you haven't read it already, the Motely Fool Investment guide has a great chapter on valuing stocks.

Stock prices reflect anticipated future earnings. When a stock is expected to earn a great deal, the price and P/E rise. Believe it or not, you can make a good argument that BONZ is a cheap stock, even with a P/E of 47.

The idea is that a fairly valued stock's P/E should roughly equal its growth rate, so the P/E divided by growth rate will equal 1. Currently, First Call's mean estimate for Bonz's long term growth rate is 83%. Obviously, 83% is a phenomenal growth rate which could justify a higher P/E. As you indicated the P/E is 47. Divide 83 by 47 and you get .57, placing BONZ in the undervalued range. If BONZ delivers on the growth, the price will rise much higher than a fairly valued stock and you will make a lot of money.

That being said, I am just starting to look at this company. From what I can tell, BONZ is a one product company (someone correct me if I am wrong), so that unlike a big diversified blue chip, if Pro-osteon for some reason gets outlawed by the FDA down the line (remember Phen-fen?) the stock will get killed. Also, if BONZ fails to deliver on the anticipated growth, the fall will be much harder than for a low P/E stock.

In other words, BONZ is not for the faint of heart.

Hope that helps.
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