who's still holding?, page-8

Re-rating

When the market changes its view of a company sufficiently to make calculation ratios such as PE substantially higher or lower, this a re-rating.

Price movements, particularly large ones can be looked at by being broken down into two components:

1. profits
2. rating.

A share price goes up (or down) either because the profits (or cash flows) have increased (or decreased), or because the valuation multiples have become greater (or smaller).

As changes in profits and cash flows usually take longer to happen than changes in rating, correctly predicting how the rating will change will bring high returns.

This means that investors will usually do not only need to consider whether or not they believe a share is undervalued or over valued. They also need to consider what could act as a catalyst for re-rating. This is particularly true when looking at the short term.