Government Treasury Bill vs Equties

Having looked at the articles at
http://www.bdafrica.com/index.php?option=com_content&task=view&id=7932&Itemid=5812
and a response at
http://mjengakenya.blogspot.com/2008/06/bonds-vs-equity.html

When you buy stock, you pay a premium over current value of the stock you are buying.

This is because you factor in growth and future earnings.

There are many ways to value a stock for example.
1. P/E ratio - where you read tea leaves and guess where the stock will be one year (or many years) from now.
2. Discounted Cashflows - similar to 1. you guess where the market will be in the future
3. P/B - where you value a company basing on where it is now and how fast it has grown to date.

Most people believe 3. does not hold for new age stocks which do not have tangible assets but instead hold
intagibles.

I have done a comparison of treasury bills (1yr) and two stocks on the Ugandan exchange using the P/E
method

Here is the information we will use:
1 yr tbill gives 12% return
UCL gives 13% return on equity historically and has a P/E of 44
BOBU gives 23% ROE and has P/E of 15

in the first year since we pay a premium for buying the stock the earnings yield is 1 / PE
for UCL it is 2.3% and BOBU 6.7%

so we have the following table for increase in values for 4 years for tbills and 2 stocks

tbill 1.14 1.14 1.14 1.14
ucl 1.023 1.13 1.13 1.13
bobu 1.067 1. 23 1.23 1.23 1.23

After 2 years, bobu will have passed tbills.
After 5 years the growth would be as follows:
bobu 144%
tbills 76%
ucl 67%

will have grown to twice the tbills but ucl will not have caught up with tbills !

Now the price on the market might not reflect these underlying values but if one waits a while
the market will correct itself to these values.

Tbills beat over valued stocks. This means that on the basis of P/E and ROE one can determine
which stocks are unlikely to beat tbills in the long run.

Probably a better metric is to use the average earnings over the past 3 years than to use a forward
earnings.

I will go with Miss Kigen on this one!