Murphy's Law? An Examination of the Growth Flow Valuation Method for Technology Stocks

Abstract

Investors in high-tech stocks, from biotechnology to computer hardware, are often challenged in their assessment of these securities as many technology firms are posting negative earnings, rendering traditional stock valuation methods ineffective. An alternative approach, called growth flow, values technology stocks by taking into consideration a firm's current earnings as well as its potential earnings, which is represented by investment in research and development. This study evaluates the usefulness of the growth flow valuation method in identifying innovative high-tech companies earlier than the market and in evaluating profitable investments. The results show that a company's growth flow has a stronger relationship with stock price than either current earnings or research and development expenditures alone. This study also demonstrates the ability of growth flow to identify undervalued stocks earlier than the market.