most tipped stock, page-22

G'day Bello,

I agree with you completely that NWE is undervalued etc, but I still don't believe you should use PE ratios to justify this.

For example, imagine a one-asset company with a mammoth oil well which is expected to produce for massive cash flow for two years and then suddenly dry up. What would a fair PE ratio be? It has to be 2. (Actually, it would be slightly less than two, but we'll forget about that for the moment.)

We know Puffin will not last forever, and so the PE should reflect the limited life, less some discounting for the time value of money, and (maybe) some additional value for some more exploration upside.

PE ratios should be used by profitable companies who are in a more or less steady state as far as the business life cycle goes. They don't fairly value companies at either the beginning or the end of their lives.

You are much better off saying that NWE is going to earn $x in 08, $y in 09 etc which has an NPV of $z which is this many times their current market cap. That would be a much more reliable way of claiming that NWE is undervalued.

Cheers,

h.