Based on the historical relationship between Bristol-Myers Squibb and the drug industry, it was a pretty good bet that the company was undervalued. And boy was it. Had you bought the stock in early 1995, you would have tripled your money over the next four years. But that's an easy example. As Metz might tell you, historical relationships aren't always enough.
Valuation ultimately comes down to a company's earning potential.
And if something has changed to alter that, historical relationships can change, too sometimes drastically. Consider the case of Amgen a lightning rod for attention during the biotechnology craze of the late '80s and early '90s. The company built a record of tremendous growth on the success of a couple of products that helped anemics and cancer patients produce blood cells. Amgen's multiple averaged a lofty 62 times earnings. But in the winter of 1993, Amgen stumbled.