Davis Double Click VS Double Kill

Davis Double Click: Profits are rising, and the valuation multiples that the market is willing to provide are also increasing.

Profit growth brings the first phase of increase; valuation expansion amplifies this increase once again.

So the company's performance only increased by 20%, but possibly due to the valuation rising from 20 times to 24 times, the stock price's final increase may be close to over 40%.

Growth stocks are most likely to exhibit this effect when economic conditions improve and risk appetite increases.

Davis's double kill is just reversed.

A decline in profits is the first blow, while a contraction in valuation multiples is the second blow.

The decline will be heavier than the fundamentals themselves after the two are combined.

Profit fell by 20%, valuation cut again by 20%, the stock price didn't just drop by 20%, but rather more than a 30% drop.

High valuation industries are most likely to experience this type of decline when interest rates rise and sentiment worsens.

The essence of both is very simple:

Stock price = Earnings × Valuation multiple.

If both directions move simultaneously, it will create an amplification effect, whether upwards or downwards.

The book "The Davis Dynasty" mentioned in the Zhihu answers seems good, with a reading recommendation score of 82.4%.