What is a major flaw with using public company comparables for valuations?

Using public company comparables for valuations can indeed present significant challenges, primarily because share prices may not accurately reflect the intrinsic or real value of a company. Market conditions, investor sentiment, and speculation can heavily influence stock prices, leading to fluctuations that do not necessarily align with the fundamental performance or potential of the underlying business.

For instance, during periods of market volatility or bubbles, share prices can be driven by external factors unrelated to the company’s financial health, such as economic news, trends, or market sentiments. This misalignment can cause valuations based on comparables to be misleading, as they might suggest that a company is overvalued or undervalued based on current market conditions rather than true business fundamentals.

In contrast, the incorrect options deal with misconceptions regarding the nature of comparables. The idea that every company is identical or that all companies are publicly traded overlooks the fundamental differences in operations, growth rates, and risk profiles that exist in the market. Furthermore, stating that the stock market is infallible suggests a level of precision in market pricing that does not account for the anomalies and irrational behaviors that can occur. Therefore, while public company comparables can be a useful tool, it is crucial to apply them critically while being aware of their limitations