What is "Relative Value" and "Projected Relative Value?"

Q. How is a stock's Projected P/E Ratio calculated? What is "Relative Value", and "Projected Relative Value"? How do I calculate them? And what are they used for?

A. These figures appear on the Stock Selection Guide (at least if you're using NAIC's SSG software), and they're an integral part of determining if a stock may be a good value at its current price.

A stock's Projected P/E Ratio is calculated by dividing the Current Price by the projected Earnings Per Share for the next year. Since the market is forward-looking, this is a way of looking at the market's current expectations for a stock based on what the company is expected to earn in the year ahead. Relative Value is the Current P/E Ratio divided by the stock's historical 5-Year Average P/E Ratio. It's usually displayed as a percentage. Projected Relative Value simply uses the Projected P/E Ratio instead of the Current P/E Ratio in the calculation.

Generally, if a stock's Relative Value is less than 100 percent (its current P/E Ratio is less than its Average P/E Ratio), the stock would be considered undervalued. Again, Projected Relative Value can give you an idea of how the stock is currently valued based on the stock's earnings power in the near future.