DEFINITION of 'Rich Valuation'

Rich valuation is a term that can be used in several contexts in finance. Each context refers to pricing a security above expected levels.

  1. An asset that is being valued by investors at a very substantial premium, either in terms of its earnings or cash flow, or in relation to its peers.
  2. An asset might also be considered to have a rich valuation if it is trading at levels that are much higher than historical norms.

The term rich valuation is applicable to the valuation of any asset, but it is most commonly used with reference to stock valuations. An asset that is trading at a rich valuation may have a risk/reward payoff that is not particularly attractive to value investors.

BREAKING DOWN 'Rich Valuation'

Rich valuation refers to a situation where an asset, usually a stock, has a current market price that is high compared to a particular benchmark — either a historical average, peers or valuation modeling based upon earnings multiples or free cash flows. Stocks that are trading at very high multiples in relation to their earnings or book value (price/earnings or price/book ratios), compared to their peers, are considered to be trading at rich valuations. Similarly, a real estate investment trust would be considered to be richly valued if it is trading at a high multiple of its funds from operations (price/FFO).

Assets can often achieve rich valuations during bubbles. During the tech bubble of the early 2000s, stocks hit prices that weren't supported by typical valuation models and prices were incredibly high compared to historic norms. During the housing bubble that pre-dated the global financial crisis, home prices saw incredibly rich valuations compared to historic norms. Several years after the recent bull market started in 2009, U.S. large cap stocks are trading higher than their historical averages.

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