There is a version of stock valuation that fits on a napkin. Take the price, divide by earnings, compare the number to the market average. If it is low, the stock is cheap. If it is high, it is expensive. Buy the cheap ones, avoid the expensive ones.

This version is wrong. Not always, but often enough to matter.

A paper by Rainsy Sam, published in the Innovative Journal of Applied Science (2025), makes this case using two stocks that most investors would have judged incorrectly based on headline metrics alone.

The setup

As of January 24, 2025, Broadcom (AVGO) traded at a P/E ratio of 188. Applied Materials (AMAT) traded at a P/E of 22. Any screener, any textbook, any dinner party conversation would have pointed to AMAT as the obvious value play.

In the six months before that date, Broadcom's stock had risen 50%. Applied Materials had fallen 15%.

The "expensive" stock outperformed the "cheap" one by 65 percentage points. Something was clearly missing from the napkin math.

What the P/E ratio ignores

The P/E ratio is a snapshot. It tells you what investors are paying for one year of current earnings. It says nothing about whether those earnings are growing, shrinking, or about to fall off a cliff. It does not adjust for the cost of capital. It does not discount future cash flows. It treats a dollar of earnings from a company growing at 32% per year the same as a dollar from a company growing at 8%.

That is exactly the gap between Broadcom and Applied Materials. Broadcom's earnings growth rate was 32%. AMAT's was 8%. Once you account for that difference and apply a reasonable discount rate, the two stocks look nearly identical in terms of what you are actually getting for your money.

Two metrics that fix the problem

The paper introduces (or more accurately, revives) two related concepts:

Potential Payback Period (PPP) asks: how many years of discounted, growing earnings does it take to recover the current stock price? It is essentially a P/E ratio that accounts for growth and the time value of money. When growth and discount rate are both zero, PPP collapses to the standard P/E. The P/E ratio is just a special case of PPP, and not a very useful one.

Stock Internal Rate of Return (SIRR) converts the PPP into an annualized implied return. It answers a different question: given this payback horizon, what compound annual return am I getting?

For Broadcom as of January 24, 2025: PPP was 16.85 years, SIRR was 4.20%.
For Applied Materials: PPP was 16.89 years, SIRR was 4.19%.

Nearly identical. Despite a 9x difference in P/E ratios.

The three-month follow-up

In the three months after that analysis date, both stocks declined by roughly the same amount: AMAT fell 25%, Broadcom fell 28%. The convergence in performance tracks with the convergence in SIRR. Two stocks that looked wildly different through the P/E lens behaved almost identically when measured by a metric that actually incorporates growth and discounting.

The paper also applies the same logic to the S&P 500 as a whole. At a P/E of 30, the index looked stretched by historical standards. But with 18% earnings growth and a 4.62% risk-free rate, the PPP came out to 13.1 years with a SIRR of 5.43%, above the Treasury yield. By that measure, the market was not overvalued at all.

Where this gets useful and where it does not

The PPP framework is not new. Sam originally published on the concept (under a different name) in 1984. The math is sound and the intuition is correct: you cannot evaluate a stock's price without knowing what the earnings are doing and what discount rate applies.

But there is an obvious catch. The formula requires an earnings growth estimate and a discount rate. Both are uncertain. A small change in the growth assumption shifts the PPP meaningfully. The paper uses trailing or consensus estimates, which carry their own risks, especially around turning points. The entire thesis about the S&P 500 not being overvalued in January 2025 rests on 18% forward earnings growth holding up. Three months later, as the paper itself notes, political disruption changed that equation.

So PPP is not a crystal ball. It is a better framework than P/E, but it still depends on the quality of your inputs. Garbage growth assumptions in, garbage valuations out.

The takeaway for systematic investors

For anyone building quantitative models, the lesson is not that PPP should replace P/E as a screening metric. It is that valuation factors without growth adjustment are incomplete. This is well understood in academic factor research (the Fama-French five-factor model added profitability for a reason), but it is still underappreciated in practice.

If your value signal is raw P/E or raw earnings yield, you are systematically mispricing high-growth companies. That does not mean high P/E stocks are always bargains. It means the P/E ratio alone cannot tell you whether they are or not.

The real work starts when you combine valuation with growth, quality, and risk, and let the data decide how much weight each deserves. Static ratios are a starting point. They should not be the destination.

Reference: Sam, R. (2025). Challenging Conventional Wisdom: How a Stock with a P/E Ratio of 200 Can Outperform One with a P/E Ratio of 20 and How an Entire Stock Market Can Defy Expectations. Innovative Journal of Applied Science, 2(3), 24. DOI: 10.70844/ijas.2025.2.24