ANALYSIS FOR WAL-MART

Conversely, companies' P/E multiples soared to 40 or more times earnings in 1968 and 1972, when interest rates were much lower. Interest rates at this time were 5 to 6 percent, but future growth expectations were very high.

There is also a strong inverse correlation between the long-term inflation trend and the P/E multiple. During inflationary periods, P/E ratios have ranged between 5 and 10. The ratio rises to between 15 and 20 in disinflationary or deflationary times.

A rule sometimes cited is that stock market conditions determine 50 percent to 55 percent of a stock's performance, the industry group determines 30 percent, and the company itself represents 15 to 20 percent. The 50 to 55 percent attributed to stock market conditions may be justified by the fact that the P/E reflects the market, which in turn reflects interest rates. Conversely, interest rates reflect the market, which is reflected by the P/E multiple. However, a flaw in the industry group theory, which determ...