2. An analyst plans to use P/E and the method of comparables as a basis for recommending one of two peer group companies in the personal digital assistant business.

Data on the companies’ prices, trailing EPS, and expected growth rates in sales

(five-year compounded rate) are given in the table below. Neither business has been profitable to date, and neither is anticipated to have positive EPS over the next year.

Price Trailing EPS P/E Expected Growth (Sales)

Hand $22 −$2.20 NM 45%

Somersault $10 −$1.25 NM 40%

Unfortunately, because the earnings for both companies were negative, the P/Es were not meaningful. On the basis of the above information, answer the following questions.
A. State how the analyst might make a relative valuation in this case.
B. Which stock should the analyst recommend?