Valuing Against a Peer Set
A multiple only means something next to something else. Choosing what that something else is does most of the analytical work.
MadStockAlerts Research · Updated August 28, 2026
What to take away
- A peer group should share economics, not merely an industry classification.
- Compare on the multiple that suits the business, not always on the P/E ratio.
- Use medians rather than means: one extreme member distorts an average badly.
- A persistent discount is often deserved, and identifying why is the useful part.
- The spread within a peer set is itself information.
MAD Academy Training Video · 0:45
The Peer Set Decides the Answer
Relative valuation is only as honest as the comparison group, and choosing the group is where most of the judgement lives.
This lesson is part of a Stock Alerts + Tools plan.
Choosing the set
Sector classifications group companies by what they sell, which is not the same as grouping them by how they earn. A payments processor and a regional bank can carry the same sector label and share almost no economics.
- Similar growth rates, because growth is the largest driver of multiples.
- Similar margin structure, so revenue multiples are comparable at all.
- Similar capital intensity and reinvestment requirement.
- Similar customer type and revenue model: recurring against transactional.
- Similar size, since very large and very small companies are valued differently.
A peer set assembled on these criteria is frequently small, sometimes three or four companies, and sometimes it spans sectors. That is a feature: a set of twenty companies chosen by sector code is a set with no shared economics and no comparative meaning.
Matching multiple to business
| Situation | Multiple that fits |
|---|---|
| Stable, profitable, comparable leverage | P/E |
| Different capital structures | EV/EBITDA |
| Pre-profit or heavily reinvesting | EV/revenue, within a margin band |
| Banks and insurers | P/B alongside ROE |
| Capital-intensive and asset-heavy | EV/EBIT, since depreciation is a real cost |
Median, not mean
A peer set of eight companies containing one at 90x has a mean that describes nobody. The median is the honest central figure.
The spread around it is itself informative: a tight range means the market agrees about the industry, and a wide one means it does not. A wide spread is an invitation to ask what distinguishes the top of the range from the bottom, and the answer is usually growth or returns on capital.
Scroll the chart sideways to see all of it.
Discounts are usually earned
A company trading persistently below its peers is not automatically mispriced. Slower growth, weaker returns on capital, more leverage, governance concerns, customer concentration and a smaller public float are all reasons the market applies a discount.
Most of them are visible in the filings, which is what makes this a researchable question rather than a matter of opinion. The useful exercise is to list the plausible reasons for a discount and check each one, rather than to assume the discount is an error.
Deep Dive 2 assembles peer sets and lines up growth, margins and multiples across them.
Peer comparison and provider peer sets — for membersWhat a peer set has to hold constant
Relative valuation assumes that the companies being compared are alike in the ways that determine a multiple. Sharing an industry classification is not sufficient for that, and a set assembled by classification alone will usually contain several companies whose multiples differ for reasons that have nothing to do with mispricing.
- Growth rate, since a company growing at twice the rate of another deserves a higher multiple on any framework.
- Return on capital, since a business that converts growth into value at a higher rate is worth more per unit of earnings.
- Capital intensity, which determines how much of reported profit is available rather than reinvested.
- Cyclical position, since two companies at different points of their cycle are being compared on non-comparable earnings.
- Accounting basis, particularly where one company adjusts heavily and another does not.
The practical consequence is that most peer sets should be small. Four genuinely comparable companies produce a more informative median than twenty assembled by sector code, and the exercise of deciding which companies qualify is where most of the analytical work in the method actually is.
The circularity is the method's underlying limitation and cannot be removed. Relative valuation says whether a company is cheap against its peers; if the whole set is expensive, every member of it looks fine.
Reading a discount rather than assuming it is wrong
A company trading below its peer group is not a finding. It is the start of a question, and the answer is usually visible in the same filings that produced the multiple. Persistent discounts almost always have a reason, and the analytical work is establishing whether that reason is priced correctly rather than whether it exists.
- Lower growth than the set, which every valuation framework says deserves a lower multiple.
- Lower returns on capital, meaning each unit of growth converts into less value.
- Governance: a controlling shareholder, dual-class stock, or related-party transactions disclosed in the proxy.
- Customer or geographic concentration, which raises the variance of the earnings being multiplied.
- A weaker balance sheet, which raises the required return on the equity.
- Accounting that is harder to trust, or restatements in the recent past.
The list matters because it is finite and checkable. Working through it converts a discount into either an identified reason, in which case the question is whether the discount is proportionate, or an absence of one, which is the far rarer and more interesting case.
A discount with no identifiable cause is more often a sign that the peer set is wrong than that the market is. The first thing to re-examine is whether the companies in the set are genuinely comparable.