In this video, FAST Graphs co-founder Chuck Carnevale, aka Mr. Valuation explains one of the foundational principles behind his valuation methodology: why a 15 price-to-earnings (P/E) ratio can serve as a reasonable fair value benchmark for most publicly traded companies. He emphasizes from the outset that a 15 P/E is not a rigid rule or absolute valuation, but rather a practical reference point that helps investors make sound buy, sell, and hold decisions.
Chuck argues that valuation should be based primarily on current earnings, which are known and measurable, rather than future earnings estimates, which are inherently uncertain. A P/E ratio of 15 equates to an earnings yield of approximately 6.67%, a return level that has historically aligned with the long-term returns investors have earned from stocks. This earnings yield provides a rational starting point for determining whether an investment is sound and reasonably priced.
He notes that the long-term average P/E ratio of the S&P 500 has generally fallen between 14 and 16, reinforcing the idea that 15 represents a useful baseline. The 15 P/E ratio functions much like a thermostat—it does not determine fair value by itself, but it helps investors recognize when a stock appears expensive or attractively priced relative to its earnings.
Read more: Why Value Investing is the Safest Way to Build Wealth (Part 1)
A major theme of the presentation is the distinction between valuation and return. Chuck argues that valuation measures prudence and soundness, while future earnings growth drives total returns. A company growing at 5%, 10%, or even 15% annually can still be fairly valued at a 15 P/E. However, when growth rates exceed 15%, the power of compounding becomes much more significant. In those cases, a higher valuation may be justified, and he references Peter Lynch’s famous guideline that a company’s P/E ratio can reasonably approximate its growth rate.
Throughout the video, Chuck demonstrates how the 15 P/E benchmark has historically aligned with the valuation of many companies, including Emerson Electric, Goldman Sachs, Target, FedEx, and Sonoco. He also discusses exceptions, such as Procter & Gamble, which often trades at a premium valuation, and high-growth companies like Alphabet and Meta Platforms, where higher P/E ratios may be appropriate.
