Contrast comparables with forecasted fundamentals as ways of applying price multiples when valuing, and set out the economic logic behind each

Multiples can be used in two ways. The method of comparables values a share relative to similar companies: if it trades on a lower multiple than its peers, it may be undervalued. The economic rationale is the law of one price, that similar assets should sell at similar prices. The method based on forecasted fundamentals derives a justified multiple from a discounted cash flow model, for example the leading P/E from payout, required return and growth; its rationale is that value depends on the company's own expected cash flows and risk. Comparables give only relative value, so a share can look cheap within an expensive sector. Fundamentals give an absolute view but depend on forecasts. The trap is treating a comparables result as intrinsic value.