Good Stock or Just Hype? Pt. 2: Valuation Metrics That Matter

In Part 1 of this series, we focused on fundamentals. Revenue growth, profitability, margins, balance sheets. The basics that tell you whether a company is real or just riding a wave.

But fundamentals alone don’t tell the full story.

A company can be strong and still be a bad investment if the price already assumes perfection. That’s where valuation comes in.

Valuation answers a different question:
Is this stock worth the price the market is asking today?

Let’s break down the valuation metrics that actually matter, without turning this into a finance textbook.

Why Valuation Matters More Than Most People Think

The market doesn’t reward “good companies.”
It rewards good companies bought at reasonable prices.

When hype is high, valuation is usually the first thing investors ignore. The story sounds good. The chart looks exciting. Social media is loud. Suddenly the price stops mattering.

That’s how people end up holding solid companies with disappointing returns.

Valuation isn’t about being cheap. It’s about understanding expectations.

Price-to-Earnings (P/E): The Starting Point, Not the Finish Line

What it tells you:
How much investors are paying for each dollar of a company’s earnings.

If a stock has a P/E of 20, investors are paying $20 for $1 of earnings.

How to actually use it:

• Compare it to the company’s own historical P/E

• Compare it to similar companies in the same industry

• Consider expected growth

A high P/E isn’t automatically bad. Growing companies often trade at premiums. The problem is when growth slows but the premium stays.

Good stock behavior:
High P/E supported by consistent earnings growth.

Hype behavior:
High P/E with slowing growth and “future potential” doing all the heavy lifting.

Price-to-Sales (P/S): When Earnings Don’t Tell the Whole Story

Some companies reinvest heavily and don’t show strong profits yet. That’s where P/S can be useful.

What it tells you:
How much investors are paying for each dollar of revenue.

This is especially helpful for:

• Early-stage growth companies

• Businesses transitioning toward profitability

But revenue alone isn’t enough.

Watch closely:
High P/S with no clear path to margins or profitability is a red flag. Growth without a plan to eventually make money is just expensive ambition.

PEG Ratio: Valuation Meets Growth

The PEG ratio adjusts the P/E by expected earnings growth.

This helps answer a critical question:
Is this stock expensive, or just growing fast?

Quick framework:

• PEG around 1 suggests valuation aligns with growth

• Well above 1 means growth expectations are already priced in

PEG isn’t perfect, but it adds context that P/E alone can’t.

Free Cash Flow: The Reality Check Metric

If there’s one place hype stocks struggle, it’s here.

Free cash flow shows how much cash a company generates after operating expenses and capital investments.

Why it matters:

• Cash pays dividends

• Cash funds buybacks

• Cash keeps companies alive during downturns

Earnings can be adjusted. Cash is harder to fake.

Good stocks:
Consistent and growing free cash flow.

Hype stocks:
Big promises, thin or negative cash flow, and constant “reinvestment mode.”

Valuation Is About Expectations, Not Predictions

Valuation doesn’t tell you where a stock will be next week or next month.

It tells you:

• How much optimism is already priced in

• How much room there is for error

• Whether you’re investing or chasing

When valuation is stretched, the company has to be perfect just to justify today’s price. That’s not a great setup for long-term investors.

Good Stock vs Just Hype: Valuation Edition

Good Stock

• Valuation aligns with growth

• Cash flow supports the price

• Expectations are realistic

Just Hype

• Price assumes flawless execution

• Numbers trail the narrative

• No margin for mistakes

Final Thought

Valuation isn’t about finding the cheapest stock.
It’s about avoiding overpaying for excitement.

If fundamentals tell you what a company is, valuation tells you whether it’s priced for reality or fantasy.

In Part 3, we’ll shift from numbers to behavior and look at how trend and momentum can help you avoid bad timing and emotional buys, even as a long-term investor.

The goal isn’t to be early. It’s to be right..